Cyprus and Investment Funds

Cyprus and Investment Funds

Newsletter, June 2021

An attractive Investment Hub

• Since 2014, Cyprus has established a pioneering legislative framework which provides, inter alia, the freedom to provide services to countries of the European Union as well as the establishment of RAIFs. In addition, it provides one of the most favorable tax systems, it has experienced and qualified professionals, while the cost of setting up and managing the Investment Funds is highly competitive.  A multitude of reasons make Cyprus one of the most attractive destinations, especially for:

• Fund Managers that are looking for a cost-efficient fund jurisdiction for setting up and managing their Funds,
• Investors that are looking for a modern, tax efficient and flexible legislative framework jurisdiction for setting up and managing their investments,
• Fundraisers / Crowdfunders that are looking for a jurisdiction offering distributing opportunities for their fund schemes to a wide range of markets.

Tax Benefits of Investment Funds

Undeniably, one of the main advantages of Cyprus is its favorable tax system, in which provisions have been incorporated covering the Investment Funds, their Managers and Investors.  Analytically:

Taxation of the Fund:

• Low Corporation Tax at a rate of 12.5% on profits after excluding allowable expenses (Possibility to be further reduced to 2.5% by utilizing Notional Interest Deduction).
• Profits on sale of financial instruments, like securities, bonds, and units of Investment Funds are excluded from tax.
• Capital gains arising from the sale of property abroad are excluded from tax.
• Capital gains from the sale of shares of foreign property companies are excluded from tax.
• Dividends Received are excluded from tax.
• Interest received is taxed at 12.5%
• 65 Double Tax Treaties
• No subscription tax on the net assets of the fund
• The disposal, redemption, or transfer of the shares of an Investment Fund is excluded from the payment of a stamp duty.
• Investment Funds may be exempted from VAT depending on their activities.
• Subject to conditions, fund management services to approved mutual funds and Alternative Investment Funds are exempt from VAT.
• Each investment compartment of an AIF or UCITS should be treated as a separate taxpayer, although they are not separate legal entities.
  
  

Taxation of the Investors:

Foreign Investors:

• No withholding tax on Dividends
• No taxation on the redemption of units
• No deemed distribution restrictions
• Investments made by investors in a mutual fund or partnership established under the Alternative Investment Funds (AIF) Law and the Collective Investment Schemes (CIS) Law will not be considered as a permanent establishment in the Republic. As a result, the income that these investors earn from these investments will be taxed in their country of residence.

Resident Investors:

• A withholding tax rate of 17% if the investor is a physical person who is both tax resident and domiciled in Cyprus (an exemption is granted for resident investors that are non-domiciled).
• No taxation on the redemption of units.
• No withholding tax if the investor is a company.
  
  

Taxation for Expatriate Fund Managers:

• 50% exemption of income earned for a five-year period from the date of first employment in Cyprus, if salary is over EUR 100.000
• Taxation for the variable remuneration received by the senior executives of the administrators/managers of AIFs which constitutes a participation in the profits of an AIF is at the rate of 8%, with a minimum tax payable of €10.000 per year (subject to certain conditions being satisfied).
  
  

Why choose Cyprus for your Investment Funds?

The existing attractive tax regime, backed with the enactment of the Alternative Investment Funds (AIF) Law in July 2014, resulted in Cyprus becoming fully modernized and harmonized with EU Directives on asset management, while enhancing both transparency and investor protection.  The new legislation not only allows the provision of Fund services within Cyprus, but also its passporting in the European capital and regional markets. At the same time, Cyprus offers privileged access to high-growth markets with which Cyprus has historically established strong business ties.

Also noteworthy is the flexibility allowed by Cyprus’ legislative framework, with a prime example being the recent modernization (in 2018) of the legislation governing AIFs providing, inter alia, the choice of setting up and operating Registered Alternative Investment Funds (RAIFs).  RAIFs do not require direct authorisation by the Cyprus Securities and Exchange Commission (CySEC).  Instead, they will immediately commence operations, as long as they are externally supervised and managed by an Alternative Investment Fund Manager (AIFM) established in Cyprus or within another EU Member State.  With this revolutionary reform, the institutional framework in Cyprus becomes even more flexible, thus resulting in significant reduction in the time and cost required for the authorisation and operation of a Fund in Cyprus. 

Furthermore, the strengthening of the investment environment in Cyprus, the low administrative and operational costs of setting up and maintaining an Investment Fund, the highly educated workforce and the multicultural environment (Businesses in Cyprus operate in English and 73% of the population speaks English) are just some of the advantages that constitute Cyprus as one of the most competitive choices for investment funds.

In addition, its key geographical position as a linking point between three continents (Africa, Asia, Europe) makes it an ideal destination as a gateway to the EU, both for the establishment and transfer of Investment Funds. 

Given the departure of the United Kingdom (UK) from the EU and bearing in mind that the Cypriot legislative framework adopts English Common Law, in conjunction with the establishment of a Double Taxation Treaty and the close relations between the two countries, Cyprus constitutes an alternative reliable destination for managers of Investment Funds operating in the UK who wish to continue to conduct their business within the EU.

Finally, it is very important to mention that Cyprus is now one of the 43 countries that have been introduced into one of the largest cross-border investment fund processing platforms, with more than 190 thousand Investment Funds. Therefore, Investment Funds registered in Cyprus can now benefit from this platform as well.

This text has been prepared and edited by our Promotion and Development Consultant, Ms. Penelope Vassiliou.

Disclaimer

This document does not constitute tax advice or inducement to take any decisions or actions. For tax advice related to the Cypriot tax system please contact a Professional Consultant in Cyprus.