Cyprus is making increasing efforts for establishing itself as an attractive investment fund center in Europe. Cyprus is regarded to be in considerable advantage compared to other countries not only due to the existence of expert and knowledgeable service providers who offer their services at a comparatively lower cost without compromising the quality of their services, but also due to the attractive tax regime. Below we highlight some these tax benefits that aim to encourage the establishment of funds in Cyprus and to attract foreign investors as well as senior executives of fund administrators in order to relocate to Cyprus and become Cypriot tax residents:
Taxation of the fund:
- Corporation tax at 12,5% on profits;
- May be eligible for Notional Interest Deduction on new equity (i.e a deduction granted in respect of new equity issued and fully paid) allowing for tax to be reduced to as low as 2,5%;
- Excluded from tax:
(a) Dividends received;
(b) Profits on sale of securities;
(c) Capital gains arising from sale of property abroad;
(d) Capital gains from sale of shares of foreign property companies.
- In practice, most AIFs generate only exempt forms of income (effectively only interest received is taxed at 12,5%) hence are not subject to Cyprus tax;
- No subscription tax on the net assets of the fund;
- May be exempted from VAT depending on its activities;
- Subject to conditions, fund management services to approved mutual funds and Alternative Investment Funds are exempt from VAT;
- Access to extensive double tax treaty network for efficient tax structuring of investment.
Taxation of Investors:
- Foreign Investors:
(a) No withholding tax on Dividends;
(b) No taxation on redemption of units;
(c) No deemed distribution restrictions.
(d) The investment by persons 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 persons earn from these investments will be taxed in their country of residence.
- Resident Investors:
(a) A withholding tax of 17% if the investor is a physical person;
(b) No taxation on redemption of units;
(c) No withholding tax if investor is a company.
Tax incentives for expatriates 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).