When asset management firms decide where to domicile their funds, the decision is usually between Luxembourg and Ireland and, to some extent, the UK and Switzerland. However, with the arrival of Ucits IV, the latest version of the European Commission's Undertakings for Collective Investments in Transferable Securities legislation, other countries in Europe have a better shot at competing with these fund-domiciling giants. Ucits IV will remove some of the red tape and open up competition.
One country that has recently been touting itself as a competitive option is Cyprus. The country is not the first that jumps to mind among asset managers, but Angelos Gregoriades, head of tax and legal at KPMG Cyprus, believes that its tax and cost structure will drive more funds to the island nation.
To date, he says there are about 80 foreign funds domiciled on Cyprus, most of which come from Greece and Russia. While he admits that this sum is far fewer than that of leading asset management countries, he claims that last year 30 foreign funds filed applications to domicile in Cyprus. As such, he believes momentum is building and that Cyprus’s fund management industry is poised for growth.
Mr Gregoriades says: “The Ucits IV legislation has created new areas where Cyprus can play a role. Our tax regime is attractive. With the new rules, managers can domicile their funds here and still manage them in places such as London. We also think we are well placed to get funds that were domiciling offshore, such as in the Cayman Islands, because the funds have the same tax benefits here.”
The offering will most certainly be competitive. Cyprus is promoting its low costs, skilled workforce, a straightforward redomiciliation process and negligible taxes. The tax structure includes a 30% cap on personal income and a 10% cap on corporate tax (which is the lowest in the EU). The country’s financial regulator adds that corporate tax can effectively be reduced to zero since gains from securities trading are tax-exempt.
Challenging the giants
However, if Cyprus is going to challenge the dominance of Luxembourg and Ireland for the fund-management domiciling industry, it certainly has its work cut out for it. With the vast majority of funds already domiciled in those two countries, few other European nations have managed to take much of their market share. Mike Warren, investment director at UK fund manager Thames River, says he does not foresee a huge shift in the domiciling market.
He says: “With Ucits IV, it’s easy for these countries to say that they’re attractive and that funds should come and set up over there. The reality is that doing it is much harder. Dublin and Luxembourg have a 30-year advantage in terms of people, systems, regulation and experience.
“The reality is that moving your domicile is a complicated, expensive and time-consuming decision. So, in the short term, I doubt very much will change. However, this isn’t to say that one country couldn’t wake up and make this happen. It would take a lot of investment, but it is a very big industry and it has been a real boost for Luxembourg and Dublin.”
While Mr Warren does not see much movement happening for retail and Ucits IV regulated funds, he does see a great deal more possibility for other countries, such as Cyprus, to attract the domiciling of hedge funds. With a much looser regulatory framework, it is far easier to redomicile these types of investment vehicles.
Morningstar, a firm that specialises in fund management trends and research, says that to date it has not seen any significant movement relating to funds choosing to domicile in Cyprus. Nadia Papagiannis, alternative investments strategist at the firm, confirms this, but she points to some figures showing that in 2009 up to the end of September there were four hedge funds domiciled in Cyprus. In the same period of 2010 there were eight such funds. While still a small number, it is nonetheless an increase and a substantial one considering the early stages of the country’s financial sector.
Cypriot officials are also quick to point out that their goal is not to compete with or replace Ireland or Luxembourg as the top countries to domicile funds. Rather, they see an opportunity as a unique regional offering to eastern European fund managers. As they are in their early days, they are not setting specific targets for how many funds they would like to attract by the end of this year.
Mr Gregoriades explains: “Our aim is not to rival Luxembourg or Ireland. Our aim is to make Cyprus a consideration for certain specific markets. We would like to be seen as an alternative solution to places such as Luxembourg and Ireland that offers advantages in cost and tax. We are focusing on the Middle East and eastern European markets, which we believe will see Cyprus as a stepping stone into Europe. But mainly what interests us are the opportunities with Ucits IV.”
The Ucits IV legislation is relatively new to Europe and it must still pass through the Cypriot parliament. While it is highly likely that it will be enacted, Cyprus has a way to go before it can attract more funds. However, the efforts and the interest of the government are there and the country is serious about attracting funds and building its financial industry.
The boom in fund domiciling in both Ireland and Luxembourg has been highly beneficial for their economies in terms of both direct and indirect benefits. When funds choose to set up shop in a country, it means more jobs, more demand for office space and a boost for other more indirect areas such as restaurants, hotels and the wider travel industry. Cyprus has seen these benefits help other economies grow and it is clearly eager to make a place for itself in the market.
The cost of this report was underwritten by the Cyprus Investment Promotion Agency. Reporting and editing were carried out independently by fDi Magazine.