Recently the Cypriot House of Representatives enacted a series of tax bills relating to the taxation of Cypriot investment funds and the introduction of a flat rate of 8% on the variable remuneration earned by managers of Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS). These amendments have been welcomed by the Investment Fund industry in Cyprus and are intended to enhance Cyprus’s attractiveness to the international funds’ community.
Taxation of foreign investors – no longer a PE in Cyprus
For many years, foreign investors were discouraged from setting up or investing via Cypriot tax transparent investment funds, due to a domestic provision effectively deeming their investment to have a permanent establishment in Cyprus (i.e. a taxable presence in Cyprus).
This provision has been removed and the investment of a non-resident (individual or company) into a Cyprus tax transparent investment fund (e.g. structured in the form of a partnership or a mutual fund) shall not be deemed to result into a permanent establishment in Cyprus for the investor.
Moreover, it was clarified that the management from Cyprus of a non-Cypriot investment fund, does not create a permanent establishment of the fund in Cyprus.
Taxation of AIFs Compartments – each compartment taxed separately
An investment fund can be set up as a standalone fund, with a single investment portfolio, or more commonly, be structured as a multiple compartment fund which has separate sub-funds (compartments) under the umbrella of a single legal entity. These sub-funds usually have their own investment policy, investor profile and generally function as independent entities.
The Cypriot tax law has been amended clarifying that each investment compartment of an AIF or UCITS should be treated as a separate taxpayer. This provision effectively brings more clarity on the taxation of umbrella funds.
Taxation of Carried Interest and Performance Fee – flat 8%
The terms “Carried Interest” and “Performance Fee” refer to the variable remuneration (usually a share of a fund’s net profits) allocated to the employees and/or the executives of an alternative investment fund management company or of an internally managed investment fund.
Provided certain conditions are met (see below), such variable remuneration earned by Cyprus tax resident individuals shall be taxed at the flat rate of 8% without any further allowances or deductions and shall not be added to any other forms of income.
An eligible individual shall have the option annually to elect whether to be taxed under this special mode of taxation or under the normal band rates that range from 0% to 35% for incomes over €60.000.
The provisions of this new mode of taxation shall apply:
- Only in the case of an individual who becomes tax resident in Cyprus upon the commencement of his/her employment by:
- An AIFM or
- A company to which the AIFM has delegated portfolio or risk management activities in relation to the AIF it manages or
- To an internally managed AIF
- Only to specific categories of “identified personnel*” and to categories of company employees in which the AIFM (or the AIFM of an internally managed AIF) has delegated portfolio management or risk activities and whose professional activities have an impact on the risk profile of the AIF (managed by the AIFM) or the AIFM to an internally managed AIF, respectively.
*refers to categories of employees who receive an overall remuneration which brings them to the same salary bracket as senior management and those who assume risks and whose professional activities have an essential impact on the risk profile of the AIFM or the AIF they manage.
- Only where the right to participate in the carried interest (or performance fee) is granted if the net asset value of the AIF (or UCITS) exceeds the initial investment of the investors.
- For a total period of ten (10) years, in one or more employment including the start year and the year of termination of employment. After the ten-year period has elapsed, whether continuous or otherwise, the individual shall be taxed under the normal mode of taxation.
- The minimum amount of tax payable annually under the above provisions shall be €10.000.
- In case the remuneration (carried Interest or performance fee) is paid in the form of securities (e.g. shares) its value shall be equal to the market value of the securities on the date when their ownership was transferred to the individual less any amount paid by the individual for their acquisition.
- The term “Carried Interest” does not include any share of profits accruing to the individual as a proportionate return on his/her investment in the AIF (e.g. any dividend income).
- The term “Performance Fee” means a variable remuneration linked to the UCITS Performance and may be based on data such as a share of capital gains or by the increase in the value of the funds of the UCITS net asset value or by an increase in any part of the UCITS net asset value compared to an appropriate securities index or other investment return measure;
- “UCITS performance” means the increase in the value of funds and any income linked to UCITS assets, such as dividends, which can be estimated in relation to a performance target.
The provisions of this new mode of taxation shall not apply to:
- an individual who was tax resident in Cyprus in any three (3) of the five (5) years preceding the year in which his/her employment in Cyprus began; and
- an individual who was resident in Cyprus in the year preceding the year of commencement of his/her employment and whose employment in Cyprus began before the date of entry into force of the tax amendments (i.e. before 30/07/2018);
Dividends from collective investment schemes – taxed normally under 17%
Actual or deemed dividends earned by Cyprus tax resident individuals from a Cypriot investment fund were previously taxed at the lower rate of 3%. The relevant provision has been amended, and such dividends will be subject to tax at the rate of 17% under Special Defence Contribution. It is noted that Cyprus tax resident, but non-domiciled individuals are exempt from this tax. Also, this provision does not apply in the case of funds structured in the form of common funds or partnerships.
Cyprus offers one of the most competitive tax regimes in Europe and has an extensive network of double taxation treaties. A member state of the European Union since 2004 and of the Eurozone since 2008, the country’s regulatory regime is in full compliance with EU tax directives. Cyprus was also an early adopter of the OECD Common Reporting Standard as well as being FATCA-compliant. This coupled with one of the lowest corporate tax rates in the EU at 12.5%, places Cyprus high on the list of preferred jurisdictions for international tax planners. The island is also increasingly becoming a destination of choice within the EU for Fund Managers and Management Companies.
We are at your disposal to discuss the above matters and any other Cyprus tax matters of your concern.
Head of Tax Services
ATCA Co. Ltd