The Cyprus fund sector has become one of the most dynamic sectors of the economy, and the country is fast becoming a location of choice for asset managers. Two investment vehicles being utilised by asset managers for the undertaking of relevant investments are the Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS).
AIFs are utilised by asset managers for the raising of capital from several investors, to be invested in accordance with a defined investment policy for the benefit of such investors. The law governing AIFs, which was recently amended, provides for:
A. Three (3) types of AIFs:
Alternative Investment Fund with Limited Number of Persons;
Alternative Investment Fund with Unlimited Number of Persons; and
B. Three (3) forms of AIFs:
Investment Company (with variable or fixed capital); and
Limited Partnership (with or without separate legal personality).
UCITS are utilised for the collective investment in transferable securities and/or other liquid financial instruments. The law governing UCITS provides for two forms of UCITS:
Common Fund; and
Investment Company (with variable capital).
Funds of a corporate form that are considered Cyprus tax residents are subject to the normally applicable provisions of the Cyprus tax laws.
Funds of a non-corporate form are generally considered as transparent for tax purposes.
Main tax and VAT aspects arising from the establishment and operation of Funds
Interest received by a Fund is considered active interest income and taxed under corporation tax at the rate of 12,5%. No Special Contribution to the Defence Fund shall apply. The application of Notional Interest Deduction (NID) is available to Funds.
Inbound dividends received by a Fund shall generally be exempt subject to the applicable participation exemption conditions.
The profits arising from the disposal/redemption of shares/units of a Fund are exempt from Income Tax and are not subject to Capital Gains Tax on the understanding that the Fund does not own directly or indirectly immovable property situated in the Republic of Cyprus.
No withholding tax is levied on profit distributions made to non-Cyprus tax resident investors or to Cypriot tax resident companies. A withholding tax at the rate of 17% shall be made on profit distributions made to individuals who are both tax residents and have a domicile in Cyprus.
The subscription, redemption, conversion or transfer of a Fund’s shares/units shall be exempt stamp duty.
Dividends deemed to be received by domiciled Cyprus tax resident investors are subject to Special Defence Contribution at the rate of 17% (as opposed to 3%).
No permanent establishment shall be created in Cyprus where a non-Cyprus tax resident investor invests in a Cyprus tax-transparent investment fund or in case a non-Cyprus investment fund is managed from Cyprus.
Each compartment of an AIF or UCITS shall be treated as a separate person for tax purposes.
Subject to satisfying a number of conditions, employees who were non-Cyprus tax resident prior to their commencement of their employment in Cyprus with an investment fund management company or an internally managed investment fund have the option to be taxed at a flat rate of 8% instead of the normal personal income tax rates ranging from Nil to 35%. However, there is a minimum tax liability of €10.000 per annum. This special mode of taxation is available for a period of 10 years.
Income of qualifying special investment funds, such as AIFs in transferable securities, is exempt from Cypriot VAT. VAT treatment of Funds income depends on the nature and features of transactions carried out.
Funds investing in real estate, earning income from leasing or disposal may need to account for VAT on relevant income depending on nature of property and status of customer.
As per Cyprus Tax Department guidance, management services, inclusive of certain ancillary marketing and administrative services, provided to special investment funds are exempt from VAT. The same shall apply to certain outsourced elements.
Input VAT recovery of investment management services providers is an area requiring attention given the restriction to deduct input VAT even in cases where provided services are directed to non-EU qualifying funds. Attention on input VAT recovery is essential for Funds as well since an element of recovery may exist at the level of the Fund depending on the sources of income and mode of operation.