Answer ... Alternative investment funds (AIFs) in Cyprus are subject to standard taxation rules. Hence, AIFs, AIFs with a limited number of persons (AIFLNPs) and registered AIFs (RAIFs) established in the form of an investment company enjoy the same tax benefits as companies incorporated under the Companies Law. The taxation framework for such funds in Cyprus includes:
- a corporate income tax of 12.5% on profits;
- a tax exemption on dividend income and on the disposal of securities;
- an exemption from stamp duty regarding the subscription, redemption, repurchase or transfer of units; and
- the absence of withholding tax on dividend payments or redemptions.
Such incorporated funds, as tax residents of Cyprus, can also claim double tax treaty benefits under Cyprus’ wide network of double tax agreements.
AIFs in the form of a common fund or a limited partnership are considered as tax transparent funds and are thus subject to the tax laws applicable to each investor.
Each compartment of an umbrella AIF is considered as a separate entity for tax purposes and the relevant taxation rules apply to each compartment.
Answer ... Most AIF managers (AIFMs) are typically structured as a company and as such are subject to the standard rules of taxation discussed in question 8.1.
An amendment to Cyprus tax law introduced provisions on the tax treatment of a carried interest received by a Cyprus tax-resident employee of an AIFM. The law defines a ‘carried interest’ as a profit share in the AIF, which is allocated to employees of a management company as a reward for their management of the fund. Subject to the requirements set out by law, the employee may elect that the carried interest distributed to him or her be taxed at the flat rate of 8%. In that case, the minimum payable tax per year is €10,000, for a maximum period of 10 years. If the employee waives this right, the standard taxation rules will apply and no minimum tax will be payable.
These provisions apply if the taxpayer is employed at one of the following entities:
- an AIFM;
- a company to which the AIFM has delegated either portfolio or risk management; or
- an internally managed AIF.
Finally, according to the law, only specific types of employees (eg, senior management, risk takers) may elect for taxation at the flat rate of 8% for their carried interest.
Answer ... The tax rules regarding investors vary, depending on whether the investor is Cyprus resident.
Cyprus resident investors are subject to the rules of the Cyprus tax framework regarding income arising from their investment in an AIF in Cyprus.
By contrast, non-Cyprus residents that invest in an AIF in Cyprus in the form of a common fund or partnership are not considered to have a permanent establishment in Cyprus for tax purposes. Hence, they are exempt from any withholding tax on distributions and from any tax on the redemption of their units in an AIF, under Cyprus law. However, the national tax legislation of their country of residence may apply.
Answer ... The US Foreign Account Tax Compliance Act and the Common Reporting Standard are both applicable in Cyprus, as Cyprus has signed the respective treaties and adopted local legislation for their implementation. As a result, legal entities, including AIFMs, must comply with the reporting requirements set out in the legislation. This must be followed by reporting to the relevant jurisdictions, according to the requirements set out by law.
Answer ... Cyprus is considered an attractive jurisdiction for the establishment of collective investment schemes. Due to the favourable tax regime for companies in Cyprus, which is fully compliant with EU law, most AIFs are established in the form of an investment company and enjoy the tax benefits set out in question 8.1.