The European Long Term Investment Fund (ELTIF) kpmg.com.cy

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1 FINANCIAL SERVICES The European Long Term Investment Fund (ELTIF) kpmg.com.cy

2 3 Section or Brochure name Contents Page Introduction 1 Why ELTIFs? 2 Why Cyprus for ELTIFs? 4 Requirements for qualifying as an ELTIF 5 - Eligible assets and investment policies - Prohibited activities - Diversification requirements - Borrowing Authorisation Procedure 8 - Conditions for granting authorization by CySEC - Structure of the ELTIF - Legal forms Other conditions 12 - Redemption policy - Life of the ELTIF - Disposal of the ELTIF assets - Distribution of proceeds - Depositary Reporting and disclosure requirements 14 Marketing of units/shares of the ELTIF 15 Taxation of a Cyprus ELTIF 16 How can KPMG Help you? 17 Glossary 18

3 Introduction The European Long Term Investment Fund (ELTIF) 1 On 19 May 2015, the European Long-Term Investment Funds (ELTIFs) regulation 2015/760 (the Regulation ) was published in the Official Journal of the European Union and applies directly across all EU Member States as from 9 December The Regulation creates a new investment fund product which shall serve as an important tool for the long term financing of the EU real economy by facilitating investment in projects that require long-term capital (for instance communication, transport and energy infrastructures as well as real estate and non-listed companies). ELTIFs shall operate under the Alternative Investment Fund Manager Directive (AIFMD) regime and are targeted at investment fund managers who want to offer long-term investment opportunities to professional and retail investors across Europe using the AIFMD passport. The Cyprus legal and regulatory framework is flexible enough to cater for the set up of ELTIFs in a most efficient manner while fulfilling the minimum requirements of the Regulation. This brochure sets out certain of the relevant considerations that need to be taken into account when setting up a Cyprus ELTIF.

4 2 The European Long Term Investment Fund (ELTIF) Why ELTIFs? Single passport Marketing across the EU under the AIFMD passport. Investor base Access to larger investor base including retail (i.e. those who do not qualify as professional investors ). Optional Opting into the ELTIF regime is voluntary. Registration Simple registration requirements. Reduced risk Investment and borrowing restrictions as well as investment diversification reguirements aiming at reducing risk and providing adequate protection for its investors. Streamlined compliance Common set of standard rules in relation to eligible assets and investment limits, redemption rules and information to investors. Listing on secondary market Ability to provide investors with liquidity before the winding-up date. Taxation Favorable tax provisions for the fund and its investors.

5 The European Long Term KPMG Investment Fund Services Fund Practice (ELTIF) 3

6 4 The European Long Term Investment Fund (ELTIF) Why Cyprus for ELTIFs? On July 2014 Cyprus adopted a new modern legal and regulatory framework for AIFs, namely the Alternative Investment Funds Law (131(I) of 2014) (the AIF Law ). The provisions of the AIF Law, being in line with EU transparency requirements, achieve the right balance between the freedom of operation of the asset manager and the protection of investors. Cyprus a competitive platform from where the ELTIF label may be exercised throughout the EU: Member of the EU, Eurozone and OECD, complying with the EU Directives and regulations as well as OECD requirements; Attractive tax environment with one of the lowest corporate income tax rates in the EU and Eurozone at 12,5%; Extensive network of double tax treaties, currently with more than 55 countries; Rigorous anti-money laundering regulations; Modern and transparent legal system based on common law; Significant number of multinational companies and international banking units, further empowering the productive and positive nature of the business environment; Strategically located in the eastern Mediterranean Sea in the middle of three continents namely Asia, Europe and Africa and offering a gateway to the Middle East; Multilingual and highly educated workforce possessing international professional qualifications; Highly skilled service providers specialized in servicing the fund industry, offering a wide range of customized services in fund and acquisition structuring, fund administration, custody and audit services; Highly competitive professional services fees compared to other European jurisdictions, without compromising the level of quality of the service provided.

7 Requirements for qualifying as an ELTIF The European Long Term Investment Fund (ELTIF) 5 A variety of requirements must be met to qualify as an ELTIF; some of the key ones are summarised below. Eligible assets and Investment policies An ELTIF is restricted to investing only in the following categories of assets: At least 70% of its capital in eligible investment assets Equity or quasi-equity instruments issued by a Qualifying Portfolio Undertaking (QPU); Debt instruments issued by a QPU; Loans granted by the ELTIF to a QPU with a maturity no longer than the life of the ELTIF; Units or shares of one or several other ELTIFs, EuVECAs and/or EuSEFs provided they have not themselves invested more than 10% of their capital in ELTIFs; Direct or indirect holdings via QPU of individual real assets with a value of at least EUR 10m or its equivalent. A QPU is an undertaking (other than a collective investment undertaking) which: Is not a financial undertaking as defined in Article 2 of the Regulation (i.e. it is not a credit institution, a MiFID investment firm, an insurance undertaking, a financial holding company, a mixed-activity holding company as defined in the CRD, a UCITS management company or an AIFM); unless the financial undertaking itself exclusively finances qualifying portfolio undertakings or real assets with a value of EUR 10m or more; Either (i) is not admitted to trading on a regulated market or MTF as defined in MiFID/MiFIR or (ii) is admitted to trading and has a market capitalisation of no more than EUR 500 million; Is established in an EU Member State or in a third country that meets specific requirements. The remaining (up to) 30% in UCITS assets (set out in Article 50(1) of the UCITS IV Directive) Transferable securities admitted for trading on a regulated market or MTF; Units in other collective investment schemes; Deposits and money markets instruments. The 70% limit: Applies from the date specified in the ELTIF s rules or instruments of incorporation. This date must take into account the particular features and characteristics of the assets in which the ELTIF is to invest and must be no later than five years after authorisation of the ELTIF (or, if earlier, half the life of the ELTIF) in exceptional circumstances, this may be extended by up to a further year with the approval of the ELTIF s competent authority; Ceases to apply once the ELTIF starts to sell assets in order to redeem investors after the end of the life of the ELTIF; May be temporarily suspended (for up to 12 months) to allow the ELTIF to raise additional capital (or reduce its existing capital). Prohibited activities The Regulation prohibits an ELTIF from undertaking any of the following: Short selling of assets; Taking direct or indirect exposure to commodities, including via derivatives or indices; Securities lending; securities borrowing; repurchase transactions or any other agreement which has an equivalent economic effect and poses similar risks, if this affects more that 10% of the ELTIF s assets; Using financial derivative instruments except where this solely serves the purpose of hedging risks inherent to other investments of the ELTIF.

8 6 The European Long Term Investment Fund (ELTIF) Diversification requirements The ELTIF must not invest more than: 10% of its capital in instruments issued by, or loans granted to, any single QPU; directly or indirectly in a single real estate asset; in units or shares of any single ELTIF, EuVECA or EuSEF (also an ELTIF may not acquire more than 25% of the units or shares of a single ELTIF, EuVECA or EuSEF). can be raised to 20% if the aggregate value of assets held by the ELTIF in qualifying investment portfolios and individual real assets in which it invests more than 10% of its capital does not exceed 40% of the value of its capital. 5% its capital in UCITS eligible assets where those assets have been issued by a single body. can be raised to 25% where bonds are issued by a credit institution which has its registered office in a Member State and is subject to special public supervision designed to protect bond-holders. The aggregate value of units or shares of ELTIFs, EuVECAs and EuSEFs in an ELTIF portfolio shall not exceed 20% of the value of the ELTIF s capital. The aggregate risk exposure to a counterparty of the ELTIF stemming from OTC derivative transactions or repurchase agreements shall not exceed 5% of the value of the ELTIF s capital. Borrowing An ELTIF may only borrow cash provided that it: Represents no more than 30% of the value of the capital of the ELTIF; Is used to invest in eligible investment assets (other than loans granted to a QPU with a maturity no longer than the life of the ELTIF), provided that the ELTIF s cash or cash equivalent holdings are not sufficient to make the investment concerned; Is in the same currency as the assets to be acquired with it; Has a maturity no longer than the life of the ELTIF; Does not encumber assets making up more than 30% of the value of the capital of the ELTIF.

9 The European Cyprus Long Term - Alternative Investment Funds Fund Handbook (ELTIF) 7

10 8 The European Long Term Investment Fund (ELTIF) Authorization Procedure Conditions for granting authorization by CySEC ELTIFs are subject to special authorisation and: Are categorised as Alternative Investment Funds (AIFs) within the meaning of the AIFMD regime; Must appoint an AIFM authorised under the AIFMD unless internally managed; An AIF can only use the designation ELTIF when it has been authorised in accordance with the ELTIF Regulation; Cannot convert to a non-eltif fund; Need to appoint a Depositary. The ELTIF must comply with the provisions of both the Regulation and the AIFMD, while its manager must comply with the provisions of the AIFMD it will be responsible for ensuring compliance with the Regulation, being liable for losses or damages resulting from noncompliance.

11 Structure of the ELTIF ELTIFs are in principle closed-ended however the manager can, under certain circumstances set out in their constitutional documents, decide whether early redemption rights are appropriate. An ELTIF may consist of several compartments (an umbrella fund) with each compartment being regarded as a separate ELTIF. An ELTIF can in principle take any legal form. It may be listed or unlisted. The existing Cyprus AIF legal and regulatory framework may very well support the ELTIF product. The main characteristics of the Cyprus AIF are: Investor base: retail, institutional, professional investors; Legal Forms: corporate or contractual type; No limit to the number of shareholders/unitholders; Minimum share capital: and (if internallymanaged ); Form of shares/units: registered form; Umbrella structures with multiple investment compartments allowing the management of segregated portfolios, assets and liabilities of which are ring fenced, under a single legal entity; Possibility of listing and trading which increase the potential investor base; Possibility to transfer shares/units to third parties; Confidentiality as investors details are not filed with any public authorities; Flexible subscription and redemption (if any) terms; Flexibility as to the methods of calculation of the management & performance fees; Transparency to investors through disclosure and reporting requirements.

12 10 The European Long Term Investment Fund (ELTIF) Legal Forms Cyprus offers the choice of three different investment vehicles which are appropriate for the structuring of an ELTIF: the Fixed Capital Investment Company; the Limited Partnership; the Common Fund. Fixed Capital Investment Company (FCIC) Limited Partnership (LP) Incorporated in accordance with the provisions of the Companies Law Cap 113 as a private or public company limited by shares; The name shall include the term fixed capital investment company ; Shares must be fully paid upon issue; Fractions of shares are not allowed; May convert into an LP or a CF; Its instruments of incorporation are the memorandum and articles of association; Shall be either internally-managed or appoint an external manager in accordance with the AIF Law and the Regulation. Registered in accordance with the General and Limited Partnerships and Trade Names Law Cap 116; The name shall include the term limited liability partnership ; Tax transparent; No legal personality*; There can be only one general partner who shall exercise the management of the LP and represent it against third parties, while being liable for all the debts and obligations of the LP; The investors are the limited partners which can be both natural and legal persons and who are liable for the debts or obligations of the LP up to the amount of their contribution into the LP, and do not participate in the management of the LP; Its instrument of incorporation is the limited partnership agreement which provides high contractual freedom; May not convert into another form of AIF. Common Fund (CF) Contractual vehicle which is a pool of assets subject of collective management to the benefit of its unitholders, which are co-owners of the assets that comprise its portfolio; Tax transparent; No legal personality; Issue of fractions of units is possible; The liability of the unitholders is limited to the amount of their contribution, which is expressed in units in the CF; May not be internally managed; It must always be managed by a licensed external manager in accordance with the AIF Law and the Regulation; The assets of the CF are kept separately from any other assets held or managed by the external manager; The CF is responsible for its own liabilities and expenses as these are set out in the AIF Law and its instruments of incorporation; May convert into a FCIC or LP; Its instruments of incorporation are constituted by the common fund rules prepared by the external manager and also signed by the depositary which provide high contractual freedom. * Suggested amendments to the current partnership law will allow the general partner to elect for legal personality upon establishement of the LP

13 The European Long Term Investment Fund (ELTIF) 11 Example of how to structure a Cyprus ELTIF

14 12 The European Long Term Investment Fund (ELTIF) Other Conditions Redemption Policy Investors are not permitted to request redemption of their units/shares until the day following the date of the end of the life of the ELTIF which must be clearly indicated as a specific date in the ELTIF rules or instruments of incorporation and disclosed to investors. Earlier redemption may be permitted subject to the below conditions being met: Redemptions are not granted before the date specified in the ELTIF s rules or instruments of incorporation being the date as from which the 70% limit will apply; At the time of authorisation and throughout the life of the ELTIF, the manager can demonstrate an appropriate liquidity management system and effective procedures for monitoring the liquidity risk; The manager sets out a defined redemption policy; The redemption policy ensures that the overall amount of redemptions within any period is limited to a percentage of the ELTIF s UCITS eligible assets and that this percentage is in line with the liquidity management and investment strategy disclosed by the manager; The redemption policy ensures fair treatment of investors with redemptions being granted on a pro rata basis should the total requests for redemption within any given period of time exceed the percentage referred to above. Investors must always have the option to be repaid in cash even if the constitution permits repayment in kind. Also, redemption in kind out of the assets of the ELTIF is possible only where certain condition are met. Life of the ELTIF The life of an ELTIF must be consistent with its long-term nature and must be sufficiently long to cover the life-cycle of each of the fund s individual assets, measured according to both its illiquidity profile and economic life-style and its stated investment objective. The ELTIF s rules may also indicate the right to temporarily extend the life of the ELTIF and set out the conditions for exercising such a right. Disposal of the ELTIF assets An ELTIF must adopt an itemised schedule for the orderly disposal of its assets in order to redeem investors units or shares after the end of the life of the ELTIF and must disclose this to CySEC no later than one year before the ELTIF s termination date. The schedule must include: An assessment of the market for potential buyers; An assessment and comparison of potential sales prices; A valuation of the assets to be divested; A time frame for the disposal schedule. Distribution of proceeds An ELTIF may regularly distribute to investors the proceeds of capital generated by the assets contained in the fund. The proceeds shall not be distributed to the extent that they are required for future commitments of the ELTIF. Depositary The Regulation imposes the obligation to appoint a depositary. Where the ELTIF is marketed to retail investors: The depositary should comply with the provisions of Directive 2009/65/EC (UCITS IV as amended) as regards the eligible entities that are permitted to act as depositaries; The depositary s liability cannot be excluded or limited by agreement - any agreement that contravenes this provision will be void. Nor can the depositary discharge itself of liability in the event of a loss of financial instruments held in custody by a third party. No ELTIF assets held in custody by the depositary can be reused for their own account by the depositary or by any third party to whom the custody function has been delegated. Reuse comprises any transaction of assets held in custody including, but not limited to, transferring, pledging, selling and lending. Assets held in custody by the ELTIF s depositary may only be reused provided that: The reuse of the assets is executed for the account of the ELTIF; The depositary is carrying out the instructions of the manager of the ELTIF on behalf of the ELTIF; The reuse is for the benefit of the ELTIF and the interest of the shareholders or unit-holders; The transaction is covered by high quality and liquid collateral received by the ELTIF under a title transfer arrangement with the market value of the collateral having at all times to amount to at least the market value of the reused assets plus a premium.

15 The European Long Term Investment Fund (ELTIF) 13

16 14 The European Long Term Investment Fund (ELTIF) Reporting and Disclosure Requirements Prospectus A prospectus is required before marketing an ELTIF and in addition where it is marketed to retail investors a Key Information Document (KID) which complies with the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation (EU) 1286/2014. The prospectus must include among other: All the information required of a closed-ended fund under the Prospectus Directive 2003/71/EC and Prospectus Regulation (EC) 809/2004 and under the AIFMD; A prominent indication of the categories of assets and jurisdictions in which the ELTIF is authorized to invest in; The level of different costs which the investor will bear, either directly or indirectly, grouped under specific headings ( set up costs; acquisition of assets; management and performance related fees; distribution costs; other including professional service and audit costs). In addition the prospectus and other marketing documents shall contain: A clear statement about the illiquid nature of the ELTIF; The date of the end life and any option and conditions to extend it; Whether the ELTIF is intended to be marketed to retail investors; Investors rights of redemption; Frequency and timing of distributions of proceeds (if any); A description of the hedging policy; Clear risk warnings. Addition requirements of the prospectus: The rules or instruments of incorporation of an ELTIF shall form an integral part of the prospectus and shall be annexed thereto; The prospectus and the latest published annual report must be provided to investors on request and free of charge. The prospectus may be provided in a durable medium or on a website, while a paper copy must be delivered to retail investors on request and free of charge; The essential elements of the prospectus shall be kept up to date even if there is no continuous share or unit issuance or marketing. Annual Report The Annual Report must contain: The information required under the AIFMD; A cash flow statement; Information on any participation in instruments involving European Union budgetary funds; Information on the value of the individual QPU and the value of other invested assets, including the value of financial derivatives used; Information on the jurisdictions in which assets are located. The annual report shall be submitted to CySEC no later than six months following the financial year end (and where applicable to the competent authority of the home Member State of the AIFM).

17 Marketing of units or shares of the ELTIF The European Long Term Investment Fund (ELTIF) 15 General provisions To market the ELTIF to professional and retail investors the procedures set out under the AIFMD shall be followed: Article 31 AIFMD Article 32 AIFMD marketing passport Marketing in Cyprus (Home Member State) via notification to CySEC Marketing to other Member States via notification to CySEC. As well as any documentation and information required under Articles 31 or 32 of AIFMD, the manager must provide the CySEC with: The ELTIF s prospectus; Its KID (where it is marketing to retail investors); Information on the facilities referred to in the section below. The manager must also inform CySEC whether or not it intends to market the ELTIF to retail investors. Additional provisions applicable where the ELTIF is to be marketed to retail investors The Regulation sets outs additional obligations for fund managers marketing an ELTIF to retail investors some of which are set out below. The manager will have to put in place facilities for making subscriptions, payments or redemptions in each Member State where it intends to market as well making available the information which the ELTIF and/or the manager must provide. Additional investor protection provisions include that: The manager or distributor provide retail investors with appropriate investment advice, which means that in addition to their AIFMD authorisation, managers will need to have permission from their regulator to provide the additional services permitted under article 6(4) of the AIFMD and carry out an assessment on the suitability of the ELTIF for retail investors; The manager or any distributor will have to ensure that potential retail investors whose investment portfolio do not exceed make an initial minimum investment in one or more ELTIFs of , but do not invest more than 10% of their assets in ELTIFs; The ELTIF s constitutional documents must provide that all investors benefit from equal treatment and that no preferential treatment (such as side letters) or specific economic benefits are granted to individual investors or groups of investors; Retail investors must be allowed during the subscription period and for at least two weeks after subscription to cancel their subscription without charge; The manager must establish appropriate complaint procedures which allow retail investors to file complaints in the official language of their own Member State. The manager must also: Establish a process for assessing whether the ELTIF is suitable for distribution to retail investors taking into account at least the lifecycle of the ELTIF and its intended investment strategy; Where the ELTIF is being distributed directly, obtain information necessary to ensure that the ELTIF is suitable for the retail investor this will include information on the investor s knowledge and experience in the investment field relevant to the ELTIF, his/her financial situation including his/her ability to bear losses and his/her investment objectives including his/her time horizon; Where the ELTIF has a lifecycle of ten years or more, issue a clear written alert that the product may not be suitable for those retail investors unable to sustain such a long term and illiquid commitment.

18 16 The European Long Term Investment Fund (ELTIF) Taxation of a Cyprus ELTIF Taxation of the fund: Corporation tax at 12,5% on profits; Excluded from tax: - Dividends received; - Profits on sale of securities; - Capital gains arising from sale of property abroad; - Capital gains from sale of shares of foreign property companies. Effectively only interest received is taxed at 12,5%; No subscription tax on the net assets of the fund; May be exempted from VAT. Fund managers enjoy a 50% exemption of income earned for a five-year period from date of first employment in Cyprus (if salary is over EUR ). Taxation of the investors: Foreign investors: - No withholding tax on dividends; - No taxation on redemption of units; - No deemed distribution restrictions or taxes. Resident investors: - A withholding tax of 17% if the investor is a physical person; - No taxation on redemption of units; - No withholding tax if investor is a company; - Deemed distribution of 3% instead of 17%.

19 How can KPMG Help you? KPMG Cyprus became one of the most prominent market leaders in the fund industry over the past decade. KPMG operates through fully integrated teams that include professionals across our Audit, Tax and Advisory practices who combine a wide range of skills and experience tailored to meet the individual requirements and needs of our clients. Our services in connection with the establishment, recognition and operation of a Cyprus ELTIF include, but are not limited to: Regulatory and compliance services Assistance in set-up and structuring; Acting as promoter of the client s entire application and liaising with the Cyprus regulatory authorities, as necessary; Assistance with drafting of constitutional documents and offering memorandum; Design of corporate governance framework; Assistance with re-domiciliation. Audit Services Audit of statutory annual financial statements based on IFRS; Compliant and regulatory reporting for clients; Consultation on audit and accounting matters. Tax Services Fund structuring and transaction analysis; International tax planning and implementation of crossborder investments and transactions; Preparation and submission of corporate tax returns; VAT services in relation to fund providers and VAT compliance. Advisory Services Internal audit, risk and compliance services; Financial risk management; Transactions and restructuring; IT advisory; Business performance services.

20 Glossary AIF AIF Law AIFM AIFMD CF CRD CySEC EuSEF EuVECA FCIC IFRS KID LP MiFID MiFIR MTF OECD PRIIPs QPU UCITS Alternative Investment Fund Alternative Investment Funds Law Alternative Investment Fund Managers Alternative Investment Fund Manager Directive Common Fund Capital Requirements Directive Cyprus Securities and Exchange Commission European Social Entrepreneurship Funds European Venture Capital Funds Fixed Capital Investment Company International Financial Reporting Standards Key Information Document Limited Partnership Markets in Financial Instruments Directive Markets in Financial Instruments Regulation Multilateral Trading Facility Organisation for Economic Co-operation and Development Packaged Retail and Insurance-based Investment Products Qualifying Portfolio Undertaking Undertakings for the Collective Investment in Transferable Securities

21 Main Contacts REGULATORY & COMPLIANCE Angelos Gregoriades Chairman Head of Tax and Corporate Services T: E: Marie-Helene Angelides Senior Associate, Legal Advisor T: E: Marie-Helene.Angelides@kpmg.com.cy Christiana Loizou Senior Associate, Legal Advisor T: E: Christiana.Loizou@kpmg.com.cy TAX Costas Markides T: E: Costas.Markides@kpmg.com.cy Michael Halios T: E: Michael.Halios@kpmg.com.cy Tassos Yiasemides T: E: Anastasis.Yiasemides@kpmg.com.cy ADVISORY Iacovos Ghalanos T: E: Iacovos.Ghalanos@kpmg.com.cy Marios Lazarou T: E: Marios.Lazarou@kpmg.com.cy AUDIT Christos Vasiliou Primary Contact T: E: Christos.Vasiliou@kpmg.com.cy Demetris Vakis T: E: Demetris.Vakis@kpmg.com.cy Constantinos Kallis T: E: Constantinos.Kallis@kpmg.com.cy Costas Kalias T: E: Costas.Kalias@kpmg.com.cy Haris Kakoullis T: E: Haris.Kakoullis@kpmg.com.cy Zakis Hadjizacharias T: E: Zakis.Hadjizacharias@kpmg.com.cy Paris Elia T: E: Paris.Elia@kpmg.com.cy VAT Harry Charalambous T: F: E: hcharalambous@kpmg.com

22 KPMG in Cyprus contact details: Nicosia T: F: E: Limassol T: F: E: Larnaca T: F: E: Paralimni T: F: E: Paphos T: F: E: Polis Chrysochous T: F: E: KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Cyprus. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International Cooperative ( KPMG International ) or KPMG member firms