Investment Funds IFA Cahiers
STI Taxand
A premier tax firm that is exclusively practising in the field of Cyprus and international tax.
Investment Funds IFA Cahiers
Summary and conclusions
The Cyprus tax system, despite having been reformed several times particularly during the last decade, is still similar to the British system it originated from. To begin with, in general, the Cyprus tax legislation imposes the same tax principles on investment funds as it does on other types of entities and different types of investment funds (such as private equity, hedge funds or venture capital funds) are not taxed differently from each other. Furthermore, Cyprus tax legislation does not have a special tax regime specifically for investment funds nor does it tax domestic investment funds differently from foreign investment funds with respect to the Cyprus-source income. As a result, investment funds are generally taxable, like any other business entity, on their worldwide income at a rate of 12.5% after deducting from such taxable income any expenses that have been incurred wholly and exclusively from the production of said income. To be liable to tax, however, an investment fund needs to be both a person and tax resident in Cyprus. Accordingly, a person may be either a company or an individual. Thus, a company is considered a person whereas a partnership is not and is therefore treated as fiscally transparent. In this context, trusts and common funds are generally treated as fiscally transparent as well. Furthermore, each compartment of both UCITS funds and AIFs that are set up as companies is also considered to be a person but is treated as a separate taxpayer. Lastly, for a company to be considered a tax resident, such a company needs to exercise its management and control in Cyprus. Notably, the mere fact that a company is incorporated in Cyprus is not decisive, since Cyprus, unlike other countries, does not have in its internal law, for tax residency purposes, the incorporation test.
From a tax policy perspective, with the aim of encouraging investments and further providing tax neutrality, the Cyprus tax legislation provides various exemptions and tax incentives. Such exemptions and tax incentives, however, are provided to all tax resident companies, and therefore also apply to domestic investment funds as well. In this regard, such exemptions will exempt certain types of income that an investment fund often receives, such as dividend income and profit from sale of shares. Effectively, in general, only interest income and rental income will be taxable in Cyprus at a rate of 12.5%, whereas 75% of such rental income is additionally taxed at 3%. Consequently, at the fund level, tax neutrality is achieved to a large extent, since only certain types of income are taxable. Moreover, such tax can be further reduced by certain tax incentives. For example, if new funds are injected into a company’s equity, then a notional interest deduction is provided for up to 80% of the taxable income. As a result, the effective tax rate can be reduced to approximately 2.5%. Lastly, the tax payable can be further reduced or even be eliminated by any foreign tax paid either by a credit relief based on a double taxation treaty or by unilateral relief. In this context, Cyprus wide double tax treaty network (more than 60) can be used by investment funds i to further eliminate any international double taxation with respect to foreign taxes that might arise at the source state (where the investments are located).
With regard to the taxation of investors investing in investment funds, as discussed above, despite the fact that the Cyprus tax legislation provides certain tax-exempted income, such exemptions are applicable to all tax resident persons whether entities or individuals. To sum up, from a tax perspective, such investors will be taxed in the same manner irrespective of the fund’s type, residency, investment strategy, and the asset classes that invest, provided that the fund is not considered fiscally transparent. In addition to the tax incentives for companies noted above, the Cyprus tax legislation provides various tax incentives to expatriate tax resident individuals and tax resident individuals who are also non-Cyprus domiciled. The former exemptions apply mainly to employment income. In the event that an expatriate tax resident individual earns employment income of more than 100,000 euros, then 50% of such income is tax exempted. The latter is applicable to investment income, where a Cyprus tax resident individual who is not domiciled in Cyprus will not pay any withholding taxes with respect to any interests, dividends and rental income. What is more, investors that may be dual residents and if a double tax treaty is in place between Cyprus and the other contracting state, such a treaty, under the OECD MTC article 4, might solve the issue through the tie-breaker rule. Notably, if Cyprus is the ‘’losing state’’, such investors will not be considered residents for treaty purposes. Surprisingly, unlike other countries, there is nothing in the Cyprus tax legislation specifically stating that if Cyprus is the ‘’losing state’’, then such investors will automatically not be considered tax residents for domestic tax purposes. On the other hand, in the absence of any treaty, such investors will be taxed on their worldwide income, and will be provided with unilateral relief for any foreign taxes paid under the domestic law. Finally, to eliminate any ambiguities, the mere fact that non-resident investors are able to invest in Cyprus’ fiscally transparent investment funds (a common fund or a partnership investment fund) does not constitute a permanent establishment in Cyprus, and therefore Cyprus will not have jurisdiction to tax.
Moving on to the taxation of investment managers (may be either a company or an individual), such managers will have similar tax implications and incentives as regards to physical and legal persons, as noted above. Moreover, subject to certain conditions, any expatriate fund manager individual who is a tax resident in Cyprus can elect to tax his or her variable employment income that arises either from carried interest or performance fees at 8%. Finally, to clarify, the mere fact that a foreign investment fund is managed by a person who is a tax resident in Cyprus will not constitute a permanent establishment in Cyprus, and as a result, Cyprus will not have jurisdiction to tax.
Lastly, the Cyprus Securities and Exchange Commission is the independent public supervisory authority responsible for the supervision of both investment funds (such as UCITS and AIFs (non-UCITS)) and fund managers. Such regulatory provisions, however, generally do not impact the tax treatment of an investment fund, the investors or the fund managers. Furthermore, Cyprus has fully adopted the exchange of information mechanisms with respect to taxes, namely FATCA and OECD CRS. To this end, in general, investment funds do not have a special regime but rather follow the standard rules.
1????????Part One: Taxation of investment funds
A. Cyprus tax system
The Cyprus tax legislation (CTL) does not have one piece of legislation for taxing corporate income and another for taxing income derived by individuals. Rather, the CTL’s income tax law applies to both corporate income and income derived by individuals. Thus, the main tax legislation is the Income Tax Law of 2002 (ITL) as amended and some types of income (i.e. dividends, interests and rental income) are also subject to a special defence contribution law (SDCL). Furthermore, capital gains are taxed separately from income under the Capital Gains Tax Law (CGTL), and finally the CTL administers the Cyprus tax system under the Assessment and Collection of Taxes Law of 1978 (ACTL) as amended.
B. Charge to tax (taxable persons and residence)
As noted above, the chief legislation for taxing taxable persons in Cyprus is the ITL. Notably, to be taxed, it is necessary to be both a ‘person’ and ‘resident’ in the Republic of Cyprus.[1] ?In fact, a person may be an individual or a ‘company’,[2] ?. In this context, each compartment of either a UCITS fund or an AIF set up as a company is also considered to be a person and further treated as a different taxpayer. On the other hand, however, partnerships do not qualify as companies and therefore are not taxable entities as they are specifically excluded from the definition of the term ‘’person’’ under the ITL. As a consequence, the tax is levied on the partners of the partnership and not on the partnership itself. Effectively, the taxable profits of the partnership are computed on the same basis as any other entity (including deduction for capital allowances) and then the taxable profits / losses are allocated amongst the partners on the basis of their profit-sharing ratio, as provided in the relevant partnership agreement. To this end, each partner includes their share of chargeable profit / loss (after capital allowances) in their own income tax return, together with any other income they may have. In this context, generally both trusts and common funds are also not considered taxable entities, and therefore are treated as fiscally transparent as well.
Furthermore, with respect to companies, the ITL does not provide the incorporation test for taxing its residents; thus the mere fact that a company is registered in Cyprus is not decisive for the determination of the tax status. Instead, a company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus.[3] ?Yet, there is no definition in the ITL of what the management and control requirements are and no detailed guidelines have been issued by the Cyprus tax authorities (CTA). It is generally accepted, and in line with international tax principles, that the following (non-exhaustive) conditions should be considered in order to determine if a company qualifies as a resident for the tax purposes of Cyprus:[4]
The above criteria are essential for a Cyprus tax resident company wishing to obtain a tax residency certificate from the CTA.[5] ?Indeed, in order to obtain such a tax residency certificate, the directors of such a company would need to answer specific questions to prove to the CTA that the management and control is exercised in Cyprus.
With regard to individuals, the ITL, which is also the chief legislation for individuals, includes two tax residency tests and either one should be satisfied for an individualto be considered tax resident in Cyprus. The first is a numerical test given when an individual stays (is physically present) in the Republic of Cyprus for a period or periods exceeding a total of 183 days in the year of assessment (including holidays). Second, if an individual does not stay in any other state for one or more periods not exceeding a total of 183 days in the year of assessment and is not a tax resident in any other state for the same year of assessment, the individual is deemed to be tax resident in the Republic in the year of assessment in question, provided that the individual cumulatively meets the following requirements:
C. Taxable income of tax resident persons
Tax resident persons (companies and individuals) are taxed in Cyprus on their worldwide income which includes business income, rental income, dividends, interest, royalties, goodwill as well as any other income. It is worth mentioning that foreign-sourced income is taxed in the same way as Cyprus-sourced income. Taxable income will be taxed for each euro of chargeable income, where chargeable income is defined as income less expenses allowable under the ITL. Such expenses are, in general, allowable provided that they are wholly and exclusively incurred for the production of the said income, unless otherwise stated by the ITL.
Nevertheless, the following is a non-exhaustive list of the types of income related to the investment funds industry that the ITL specifically exempts:[6]
D. Tax incentives
With respect to companies, the ITL allows for certain tax incentives that apply to all taxable entities, and therefore to investment funds as well. First, the ITL provides for a notional interest deduction (NID) in cases where funds are introduced to a company in the form of equity instead of interest bearing or interest free loans.[7] ?As a result, a deemed interest deduction will be allowed for “new equity” funds introduced into a Cyprus tax resident company and where funds are used for the operations of the company. The deemed interest will be calculated on the basis of a?“reference interest rate”. Such a rate is equal to the yield on the 10-year government bond of the country where the new funds are invested, plus 3%, with the minimum rate being the yield on the 10-year government bonds of Cyprus, plus 3%. Furthermore, the notional interest to be deducted cannot exceed 80% of the taxable income of the company for the year, before the deduction of this notional interest.[8] ?As a consequence, if the above conditions are met, then the effective tax rate could be reduced to approximately 2.5%. Similarly, for the taxation of income from intangible property, the ITL provides the so-called “IP Box” regime. Effectively, in calculating the profits which would be subject to corporation tax, a deemed deduction is granted representing 80% of profits after the deduction of all direct costs. As a result, like NID, the effective tax rate that relates to taxing income from intangible property could be reduced to approximately 2.5%. Notably, the ITL has been recently emended in order for the IP box regime to be in line with the ‘nexus approach’ according to the BEPS 5 recommendations, and as a result the Cyprus IP box regime is, in general, considered to be nexus compliant.
E. Other taxes (SDCL and CGTL)
SDCL is only imposed on tax resident companies and on tax resident individuals who are domiciled in Cyprus, whereas tax resident individuals who are not domiciled in Cyprus are not subject to SDCL. In this context, an individual can be considered as domiciled in Cyprus either by domicile of origin or by the domicile of choice, as defined by the Wills and Succession Law of Cyprus. Accordingly, an individual at any time can have either the domicile acquired at the time of birth (domicile of origin) or the domicile acquired or is maintained by him/her as a result of actions taken by him/her (domicile of choice). As a consequence, an individual whose domicile of origin is in a country other than Cyprus (and as a result the said individual would by Cyprus non-domiciled), but who is considered to be tax resident of Cyprus, will not be subject to SDCL in Cyprus for at least 17 out of the last 20 tax years in which the individual has been a tax resident of Cyprus.
As noted above, Cyprus tax resident persons might also be subject to SDCL on certain types of income i.e. dividends, interest and rental income received from both Cyprus-sourced income and foreign-sourced income.[9] ?First, dividends received by Cyprus resident companies are not subject to SDCL as these conditions are easily met.[10] ?Dividends received by Cyprus domiciled and tax resident individuals, however, from sources both in Cyprus and abroad, are subject to SDCL at a rate of 17%.[11] ?Second, interest not arising in the ordinary activities of a taxable person (company or individual) is subject to SDCL at 30% in the form of a withholding tax on the gross amount.[12] ?In this regard, interest received by an investment fund is normally expected to be arising in the ordinary activities of a company, and as a result will be exempted from SDCL. Finally, unlike dividends and interest, rental income is generally subject to tax under SDCL, at a rate of 3% gross on 75% of said rental income. Notably, rental income is the only income that is taxable under both ITL and SDCL simultaneously. Consequently, dividends, interest and rental income received by either non-Cyprus resident individuals or Cyprus tax resident individuals, but not those domiciled in Cyprus, are not subject to SDCL.
In addition, most capital gains are exempted under the CTL and only capital gains arising from the disposal of immovable property, having its situs in Cyprus, are taxed at a rate under 20%.[13]
F. Double taxation relief
The ITL provides specifically that in case there is a double tax treaty between Cyprus and the foreign country, the foreign tax is credited against the Cyprus tax on the same income. In the absence of any double tax treaty, subject to certain conditions the tax payable could also be reduced since the ITL provides for unilateral relief for any foreign tax paid. Under the ITL, a Cyprus tax resident company will be entitled to a tax credit for any foreign tax paid on income arising in a foreign country, against the Cypriot tax payable on the same income, whether corporation tax or SDC.[14] ?In this context, the amount of the tax credit cannot exceed the amount which would be ascertained if the amount of the income were computed in accordance with the provisions of the ITL and taxed at a rate ascertained by dividing the tax chargeable on the total income of the person entitled to the income by the amount of their total income. In addition, the foreign income is inclusive of any foreign tax suffered. Furthermore, the amount of the tax credit granted to a person cannot exceed the total Cypriot tax payable by this person.
G. Taxable income of non-Cyprus tax resident persons
Non-Cyprus tax resident persons are taxable only on their Cyprus-sourced income under the ITL (non-resident persons are not subject to SDC) and on gains on immovable property having its situs in Cyprus. Notably, any taxable income is computed in the same way as for resident persons. Such income under the ITL is as follows:
H. International aspects
Turning to an international perspective, investment funds, so as to minimise their risks, often invest cross-border and therefore double tax issues may arise. Hence, as to whether or not such funds are entitled to the treaty benefits in order to eliminate international juridical double taxation is considered vital. For an investment fund to be entitled to the benefits of tax treaties, it is necessary, for the respective double tax treaty purposes, that it is both a ‘person’ and a ‘resident’, and what is more, in case of dividends, interests and royalties then investment funds need to be the beneficial owner of the income as well.[15] ?Furthermore, if an investment fund takes the legal form of a company, then it is clearly a person for treaty purposes.[16] ?Similarly, such an investment fund will also be considered as a treaty resident since companies are taxed on their worldwide income and therefore are considered as ‘liable to tax’.[17] ?That is, companies fall under the scope of the income tax law and therefore are taxed on their worldwide income, even though certain exceptions do apply with respect to certain types of income received by a company. Thus, investment funds set up as a company are not considered fiscally transparent or flow-through entities, but rather opaque and therefore are subject to comprehensive liability to tax. Consequently, from a tax perspective, companies are considered to be resident for both domestic and treaty purposes as well. Moreover, investment funds seem likely to be considered the beneficial owner of the income provided that the manager of such a fund has discretionary powers to manage the assets on behalf of the holders of interests in the fund.[18] ?Conversely, the OECD, in 2014, clarified that the beneficial owner of the income is the person that has the “right to use and enjoy unconstrained by a contractual and legal obligation to pass on the income to another person”.[19] ?Thus, for example, it seems likely an investment fund will not be the beneficial owner of the income if the manager is obliged to distribute the fund’s income to the investors (beneficiaries).[20] ?Furthermore, as Cyprus has recently signed the multilateral instrument which is expected to be in force in 2019, then claiming treaty benefits is becoming even more difficult since the Principle Purpose Test (PPT) and/or limitation of benefits clause (LOB) might be applicable, depending on the Cyprus treaty partner election.
1.1?????Widely held investment funds
1.1.1???????Taxation of domestic widely held mutual funds / UCITS, including a brief summary of the regulatory provisions applying to domestic widely held mutual funds / UCITS
The Cyprus Securities and Exchange Commission (CySEC) is the independent public regulatory and supervisory authority of the Undertakings for Collective Investment in Transferable Securities (UCITS) funds in Cyprus. In fact, UCITS funds are in principle designed for retail investors to pool their funds in order to benefit from the UCITS’s advantages and further achieve economic efficiency, rather than such investors investing directly and therefore incurring substantial costs. In this context, since retail investors are considered not well informed, UCITS funds are highly regulated and further provide increased transparency in order to protect retail investors. Furthermore, their diversified portfolio minimises investment risks.?
The transposition of the UCITS IV Directive in 2012, through the enactment of the Open-Ended Undertakings for Collective Investment Law of 2012 (UCI Law), and its further amendment in April 2016 with the transposition of UCITS V were key milestone for the Cyprus funds industry. Accordingly, a UCITS fund can take two legal forms: (i) Variable Capital Investment Company (VCIC) and (ii) Common Fund (CF). While a VCIC will be an investment company, a CF will be a contractual agreement. Moreover, the legislation provides for master-feeder funds and for umbrella funds as well. The former allows the creation of a structure investing its portfolio into another UCITS, even if they are located in another EU country. The latter are established with several investment compartments, commonly called sub-funds, with each one constituting a separate pool of segregated assets not subject to ‘cross-class liability’.
Turning to the taxation of UCITS fund, as noted above, such funds could take two forms. To begin with, if a UCITS fund is a contractual arrangement and therefore takes the form of CF, then it is in general treated as tax transparent or a flow-through entity. Hence, as noted above, the income of such a CF is taxed directly in the hands of the investors and not at the fund level. Moreover, as a CF will be treated as tax transparent, it will therefore not be considered as Cyprus tax resident. As a result, a CF will not have access to Cyprus double tax treaty network.??
On the other hand, however, if a UCITS fund takes the legal form of a company, for instance as a VCIC, then it will be considered as a person under the ITL. Furthermore, if a VCIC is found to be tax resident in Cyprus, then such a fund will be taxed at a rate of 12.5% on its worldwide income less expenses. Accordingly, since the income of a VCIC will largely be dividends and interest, then effectively only interest income will be taxed at 12.5% after deducting any expenses incurred wholly and exclusively in the production of the interest income such as interest expense. Moreover, the tax payable can be reduced by any foreign tax paid on such interest income.??
Finally, as noted above, UCITS funds are used as intermediaries for retail investors who are not always located in the UCITS fund’s jurisdiction. As a consequence, issues may arise with respect to economic double taxation. Nevertheless, the CTL does not impose any withholding taxes on distribution of dividends from a Cyprus tax resident company (and therefore from a UCITS fund) to its non – tax resident shareholders (individuals or corporations) and to Cyprus tax residents who are not Cyprus domiciled, irrespective of the existence of a double tax treaty. In a different case, however, if an individual is tax resident and domiciled in Cyprus, then a 17% withholding tax is imposed at source for any dividends paid from a UCITS fund to said individual. Additionally, in the event that an individual, whether tax resident in Cyprus or not, disposes his/her units in a UCITS fund, then such gains are exempted from the ITL. Consequently, tax neutrality is achieved to a large extent, since little or no tax is paid at the fund level and further withholding taxes are imposed only on Cyprus tax resident and domiciled individuals.??
To sum up, the CTL does not specifically provide any preferential or special tax regime with respect to the taxation of investment funds, nor does it provide a different tax regime that distinguishes between different types of investment funds. Rather, as discussed above, the CTL provides certain exceptions to particular types of income that are applicable to all companies that are tax residents in Cyprus, which could also be applicable to any ordinary business entity. Likewise, the CTL does not tax domestic funds differently from foreign funds. Furthermore, the CTL does not provide for a different definition of investment funds but rather refers to the definition of investment funds provided by the Cyprus law.
In conclusion, the key benefits of establishing a UCITS fund in Cyprus would be the robust legislative framework that protects and promotes investor interests, and further such framework is supervised by a competent and accessible regulatory authority. Such legislation provides full EU passporting rights, meaning Cyprus UCITS can be marketed and sold in other EU member states. Furthermore, UCITS can be listed on the Cyprus Stock Exchange and other recognised EU stock exchanges. Moreover, it also provides the possibility to set up umbrella funds, allowing different sub-funds with different investment strategies designed to meet investors’ particular needs and share classes with different values and separate rights for different types of investors. Additionally, upon request, investors are entitled to repurchase or redeem their units from the assets of the UCITS fund. What is more, Cyprus has a highly skilled pool of professionals and further establishing a UCITS fund in Cyprus can be considered, in general, as cost efficient to set up and operate by such professionals.
1.1.2???????Taxation of foreign widely held mutual funds / UCITS, including a summary of the regulatory provisions applying to foreign widely held mutual funds / UCITS
All foreign UCITS, which qualify under the relevant EU directive, based in another EU member state seeking to market their shares in Cyprus must follow a simple regulator-to-regulator notification process. For tax purposes, however, such a foreign UCITS fund will not be taxable in Cyprus unless such fund has its management and control exercised in Cyprus. Thus, effectively, only Cyprus-sourced income will be taxed in Cyprus with respect to non-resident foreign UCITS. Notably, as regards Cyprus-sourced income the CTL does not tax domestic UCITS differently from foreign UCITS or from any other type of company.
1.1.3???????Taxation of domestically listed exchange-traded funds (ETFs)
Domestically listed exchange-traded funds will be taxed in the same manner as UCITS funds.
1.1.4???????Taxation of foreign listed exchange-traded funds (ETFs)
The taxation of foreign ETFs will generally be similar to that of foreign UCITS funds.
1.2?????Privately placed investment funds
1.2.1???????Taxation of domestic privately placed hedge funds / alternative investment funds
Like UCITS funds, CySEC is the competent authority supervising non-UCITS, which in Cyprus are known as alternative investment funds (AIFs). The governing legislation of AIFs is the Alternative Investment Funds Law of 2018 (AIF law). In this regard, the AIF law includes AIFs with fewer than 75 (AIFLNP) and registered AIFs (RAIFs) which do not require authorisation by CySEC provided they are externally managed by an alternative investment fund manager (AIFM). Accordingly, the AIF law provides various legal forms. To begin with, an AIF can be as follows: a CF; a VCIC; a Fixed Capital Investment Company (FCIC); and finally, a Limited Partnership with or without legal personality (LP). Second, an AIFLNP could take the following legal forms: VCIC; FCIC; and LP. Finally, like AIFs, RAIFs could take the following legal forms: CF; VCIC; FCIC; and LP.
Hence, from the tax perspective, if an AIF is organised either as a CF or an LP, then it is in general treated as a fiscally transparent entity. Thus, as noted above, the income of such a fund is taxed directly in the hands of the investors and not at the fund level. Moreover, as such funds will be treated as tax transparent, they will therefore not be considered as Cyprus tax residents, and as a result will not have access to the Cyprus double tax treaty network. On the other hand, however, if an AIF is established as a company either as a VCIC or a FCIC, then as noted above, it will have similar tax implication as a UCITS VCIC. Effectively, dividend income and gain on sale of securities are generally exempted, and as a result only interest income and rental income will be taxable.
1.2.2???????Taxation of foreign privately placed hedge funds / AIFs
From a tax point of view, the CTL does not tax foreign privately placed hedge funds differently with respect to Cyprus-sourced income from domestic privately placed hedge funds. Effectively, such foreign funds will be taxable on Cyprus-sourced income only.
1.2.3???????Taxation of domestic privately placed private equity (PE) funds and venture capital (VC) funds
From a tax point of view, domestic privately placed PE or VC funds will have similar tax implications as with AIFs, as noted above.
1.2.4???????Taxation of foreign privately placed PE funds and VC funds
From a tax point of view, foreign privately placed PE funds and VC funds will have similar tax implications with foreign privately placed AIFs, as noted above.
1.3?????Special category: Closed-end funds and real estate funds
1.3.1???????Taxation of domestic closed-end funds (widely held or privately placed)
From a tax point of view, the CTL does not distinguish between domestic closed-end funds either widely held or privately placed.
1.3.2???????Taxation of foreign closed-end funds (widely held or privately placed), including a summary of the regulatory treatment (if applicable)
From a tax point of view, the CTL does not distinguish foreign closed-end funds (either widely held or privately placed) from domestic closed-end funds.
1.3.3???????Taxation of domestic real estate funds and infrastructure funds (widely held or privately placed), including the taxation of domestic real estate investment trusts (REITs)
The CTL, unlike other countries such as the UK, does not have a special regime for REITs. A domestic real estate fund will be taxed in the same way as an ordinary company. Effectively, real estate companies’ income often consists of rental income, gain on disposal of real estate and any interest income from loans provided.[21] ?Hence,in general the real estate fund income will be taxed at a rate of 12.5%?less any relevant expenses,. Further, rental income is also taxed at 3% under SDCL. Nonetheless, the tax payable can be reduced by any foreign tax paid abroad. Lastly, the corporate tax rate of 12.5% can further be reduced to approximately 2.5% in the event that, as noted above, NID is claimed.???
1.3.4???????Taxation of foreign real estate funds / infrastructure funds (widely held or privately placed), including the taxation of foreign REITs
The CTL does not tax foreign REITs differently from domestic REITs.
2????????Part Two: Taxation of investors investing in investment funds
2.1?????Widely held investment funds
2.1.1???????Taxation of investors investing in domestic widely held mutual funds / UCITS
The income derived by investors (private individuals or corporate/institutional investors) investing in domestic widely held mutual funds / UCITS will often be investment income, such as dividend income and profits from sale of units in such funds. The taxation of such investors will depend on whether the investors are tax resident in Cyprus or not. If such investors are not tax resident in Cyprus, then they will be subject to ITL only (SDCL applies only to Cyprus tax residents) with respect to certain Cyprus-sourced income. Yet, any dividend income or profit from sale of units is specifically exempted from ITL, and therefore it seems likely that non-resident investors investing in mutual funds / UCITS will remain untaxed. On the other hand, if such investors are Cyprus tax residents, then their taxation depends on whether they are physical persons or taxable entities. In case of the former, tax resident individuals that are not domiciled in Cyprus will also remain untaxed since they are not subject to SDCL, whereas Cyprus tax resident and domiciled individuals will be subject to SDCL at a rate of 17% with respect to dividend income.
If the investors take the form of an entity that is tax resident in Cyprus, then they normally will be taxed at a rate of 12.5% on their worldwide income with certain exemptions as discussed above. However, the income (arising from institutional investors’ equity interest in an investment fund) that such investors receive will largely be dividend income and profits from the sale of shares. As noted above, dividend income and profit from the sale of shares are in general not taxed under the CTL, and as a result institutional investors receiving such income will remain untaxed.?
From a policy perspective, countries often use two types of shareholder’s taxes over their residents, namely income tax on dividends and further capital gains tax on the disposal of shares. Notably, policymakers to achieve a non-distortionary tax system aim to impose the same tax rate for both income tax on dividends and capital gains tax on the disposal of shares. As a result, individual or corporate shareholders’ will be indifferent on how they will realise their investment for example in an investment fund. In Cyprus, however, where there is not capital gains tax on the sale of shares, investors’ that are tax resident and domiciled in Cyprus will be better off to dispose their interest in an investment fund rather than receiving dividends and as a consequence create distortions.
2.1.2???????Taxation of investors investing in foreign widely held mutual funds / UCITS
The CTL does not tax investors differently depending on whether they invest in domestic widely held mutual funds / UCITS or in foreign widely held mutual funds / UCITS.
2.1.3?????Taxation of investors investing in domestically listed ETFs
The taxation of investors investing in domestically listed ETFs will be similar to the taxation of investors investing in UCITS funds, as noted above.
2.1.4?????Taxation of investors investing in foreign listed ETFs
As with foreign UCITS funds, the CTL does not tax investors differently depending on whether they invest in domestic listed ETFs or in foreign listed ETFs.
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2.2?????Privately placed investment funds
2.2.1???????Taxation of investors investing in domestic hedge funds / alternative investment funds (AIFs)
The CTL does not tax investors differently depending on whether they invest in domestic hedge funds / AIFs or in widely held funds such as UCITS funds.
2.2.2???????Taxation of investors investing in foreign hedge funds (high tax jurisdiction)
The CTL does not tax its residents differently depending on whether they invest in domestic hedge funds / AIFs as compared to investing in foreign hedge funds (high tax jurisdiction).
2.2.3???????Taxation of investors investing in foreign hedge funds domiciled in an offshore, low tax jurisdiction
The CTL does not tax its residents differently depending on whether they invest in foreign hedge funds (high tax jurisdiction) or in foreign hedge funds (low tax jurisdiction).
2.2.4?????Taxation of investors investing in domestic PE funds / VC funds
The CTL does not tax its residents differently depending on whether they invest in domestic PE funds / VC funds or in domestic hedge funds / AIFs.
Notwithstanding the provisions discussed earlier, the ITL provides tax reliefs for individual investors in qualifying small and medium-sized innovative enterprises. Effectively, independent individual investors investing directly or via an investment fund in such innovative enterprises would be allowed to deduct from their taxable income the relevant cost for such investment being limited to the lower of EUR 150,000 or 50% of such investor’s taxable income.[22] ?Unless extended, this provision will be available until 1 January 2020. A small and medium-sized companies are qualified as such according to Annex 1 of EU Regulation 651/2014 and further, in order to qualify as an innovative enterprise, it would need to receive the approval of the Cyprus Ministry of Finance which requires that at least 10% of the company’s total operating costs are incurred from research and development as defined in the international accounting standards. It is worth mentioning, however, that this particular tax relief is not provided to investors investing in investment funds. Rather, it is provided to individual investors investing in qualifying small and medium-sized innovative and start-up enterprises either directly through their own funds or indirectly through investments funds, in order to foster investments in innovative and start-up enterprises.
2.2.5?????Taxation of investors investing in foreign PE funds / VC funds
The CTL does not tax its residents differently depending on whether they invest in domestic PE funds / VC funds or in foreign PE funds / VC funds.
2.2.6???????Taxation of investors investing in foreign PE funds / VC funds domiciled in an offshore, low tax jurisdiction
The CTL does not tax its residents differently when investing in domestic PE funds / VC funds as compared to foreign PE funds / VC funds either in a high or low tax jurisdiction.
2.3?????Special category: closed-end funds and real estate funds
2.3.1???????Taxation of investors investing in domestic closed-end funds (widely held or privately placed)
The CTL does not tax its residents differently depending on whether they invest in domestic closed-end funds or in open-end funds. Furthermore, the CTL taxes its residents in the same manner when they invest in domestic closed-end funds, either widely held or privately placed.
2.3.2???????Taxation of investors investing in foreign closed-end funds (widely held or privately placed)
The CTL does not tax its residents differently depending on whether they invest in domestic closed-end funds or in foreign closed-end funds, either widely held or privately placed.
2.3.3???????Taxation of investors investing in domestic real estate funds (widely held or privately placed), including REITS
The CTL does not tax its residents differently depending on whether they invest in domestic real estate funds or in other types of investment funds, either widely held or privately placed. The CTL does not include any special regime for REITS either.
2.3.4???????Taxation of investors investing in foreign real estate funds (widely held or privately placed), including REITS
The CTL does not tax its residents differently depending on whether they invest in foreign real estate funds or in domestic real estate funds, either widely held or privately placed. The CTL does not include any special regime for foreign REITS either.
3????????Part Three: Taxation of investment managers
CySEC is the responsible authority with respect to the authorisation and supervision of the management of investment funds in Cyprus. Accordingly, an investment fund can be either externally managed or internally (self-)managed by its board of directors’ subject to certain conditions. To begin with, investment funds can be externally managed by: (i) an alternative investment fund manager according to the alternative investment fund manager law; (ii) a UCITS management company according to the UCITS law; or (iii) by an investment firm according to the investment services law.
From a tax perspective, an investment fund can either be managed by an investment manager in the legal form of an investment company or it can be internally managed by individuals. Thus, like investors noted above, taxation of investment managers involves both taxation of companies and taxation of individuals. As noted above, the taxation of an investment management company, if it is tax resident in Cyprus, will be at a rate of 12.5% on its worldwide income less any allowable expenses incurred wholly and exclusively for the production of such income. Effectively, the income of such a company will often comprise a fixed management fee and additionally a performance fee or carried interest.
If the investment manager is an individual (either employed by a fund management company or internally managing an investment fund) tax resident in Cyprus, then such an individual is taxed, as noted above, on their worldwide income. Such employment income will be taxed at progressive rates where the higher rate is 35% as regards employment income of more than €60,000. Nonetheless, in general, certain exceptions apply with respect to first employment in Cyprus. In fact, any expatriate individual who was based overseas, and who was non-Cyprus tax resident before the commencement of their employment in Cyprus, can be allowed a 50% exemption of the income from employment if the salary is at least €100,000 in the first ten years of employment.[23] ?Alternatively, if such individual employment income is less than €100,000, then 20% of that income is exempted with a maximum tax credit of €8,550. Moreover, as noted above, such individuals are also likely to be non-Cyprus domiciled, and therefore they will be exempted from any withholding taxes with respect to dividends, interest and rental income, imposed under SDCL. Finally, an expatriate investment fund manager individual, under certain circumstances, can elect to pay a flat rate of 8% on their carried interest or performance fee earned (i.e. the variable employment remuneration which is in essence connected to the carried interest or performance fee) from exercising fund management activities in Cyprus, having a minimum tax liability amounting to €10,000 per annum.[24] ?It is noted, however, that such an exemption applies only to the carried interest or performance fee (the amount for a period of ten years in total) and cannot be used together with other tax reliefs such as the 50% exemption of taxable income that applies to expatriates, as noted above.
3.1?????Investment managers managing widely held investment funds
3.1.1???????Taxation of investment managers managing widely held domestic and/or foreign investment funds / UCITS / ETFs
The CTL does not tax investment managers managing widely held domestic UCITS funds differently from investment managers managing widely held foreign UCITS funds. Effectively, in the event that the investment manager takes the form of a company, then both management fee and performance fee will be subject to corporation tax at a rate of 12.5% following the deduction of expenses that were incurred wholly and exclusively in the production of income. On the other hand, in the event that the investment manager is an individual, then both the management fee and the performance or carried interest fee will normally be taxed at a capped rate of 35% on personal income. In this context, all expatriate individuals and therefore individuals that manage investment funds can be exempted up to 50% of their taxable income provided that their employment income is more than €100,000. To this end, subject to certain conditions, such expatriate individuals may elect for their carried interest or performance fee only to be taxable at 8% with a minimum tax liability of €10,000.
3.1.2???????Taxation of investment managers managing ETFs
The CTL does not tax investment managers working in widely held domestic ETFs differently from those working in widely held foreign ETFs.
3.2?????Investment managers managing privately placed investment funds
3.2.1???????Taxation of investment managers managing domestic and/or foreign hedge funds / alternative investment funds
The CTL does not tax investment managers managing privately placed domestic and or foreign hedge funds / AIFs differently from investment managers managing widely held domestic or foreign UCITS.
3.2.2???????Taxation of investment managers managing domestic or foreign PE or VC funds (including infrastructure funds)
The CTL does not tax investment managers managing domestic or foreign PE / VC funds (including infrastructure funds) differently from domestic or foreign hedge funds / AIFs.
3.3?????Special category: Tax treatment of managers managing closed-end funds or real estate funds
3.3.1???????Taxation of the management fee
Management fees are taxed in the same way as noted above.
3.3.2???????Taxation of performance fees
Performance fees are taxed in the same way as noted above.
4????????Bibliography
Taliotis, A. (2018)?Cyprus – Individual Taxation, Country Surveys IBFD.
Taliotis, A.?(2018)?Cyprus – Corporate Taxation, Country Surveys IBFD.
Neofytou, N. (2017).?Cyprus in International Tax Planning.
OECD (2010).?The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles.
OECD (2010).?Tax Treaty Issues Related to REITs.
Reimer E. & Rust A. (2015).?Klaus Vogel on Double Taxation Conventions?(4th ed.). Wolters Kluwer.
Vermeulen, H. (2014).?The Tax Treatment of CIVs and REITs.?IBFD.
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[1] ?ITL art. 5.
[2] ?ITL art. 2.
[3] ?ITL art. 2.
[4] ?Neofytou N., Cyprus in International Tax Planning (2018, Redimus Publications and Training Services Ltd.) 27.
[5] ?Tax circular 2015/19 dated 30 October 2015.
[6] ?ITL art. 8.
[7] ?ITL art. 9 (B).
[8] ?ITL art. 9(1)(e).
[9] ?SDCL art. 3.
[10] ?That is, the exemption does not apply where both the company paying the dividend engages directly or indirectly more than 50% in activities which lead to investment income and further the foreign tax burden on such income is ‘substantially lower than the Cyprus tax’ burden. Notably, the words substantially lower than the Cyprus tax are not interpreted in the law, but in general means lower than 50% of the Cyprus corporation tax burden, i.e. lower than 6.25%.
[11] ?SDCL art. 3(2)(a).
[12] ?SDCL art. 3(2)(b).
[13] ?CGTL art. 4.?
[14] ?ITL art. 35.
[15] ?OECD, ‘The Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles’ [2010] CFA, R-(24) paras. 22-35.
[16] ?OECD MTC art. 3(1).
[17] ?OECD MTC art. 4(1).
[18] ?OECD Commentary art. 1 para. 28.
[19] ?OECD Commentary art. 10 para. 12 and Commentary art. 11 para. 10.
[20] ?E. Reimer and A. Rust (eds.), Klaus Vogel on Double Tax Conventions (4th ed., 2015, Wolters Kluwer) 114.
[21] ?OECD, ‘Tax Treaty Issues Related to REITs’ [2008] CFA, R-(23).
[22] ?ITL Article 9A.
[23] ?ITL art. (8)(23).
[24] ?ITL art. (20)(B) & art. (20)(Γ).
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The article was published in International Fiscal Association; Cahiers de Droit Fiscal International – Cyprus Branch Report.
Christos Theophilou