Executive Summary

On 10 July 2018, the Cypriot House of Representatives voted for a series of tax bills relating to the taxation of the operation of investment funds and the asset management industry of Cyprus in general. The tax bills are intended to govern the taxation of investors in Cypriot non-corporate form investment funds and the taxation of carried interest for fund managers. These new rules will come into force once the legislation is published in the Official Government Gazette.

Detailed discussion

The main features of the bills are summarized below.

Taxation of foreign investors into Cypriot funds

Following the amendments of the Income Tax Law (ITL), a new addition has been made to the definition of the term "permanent establishment" (PE). Under the new definition, the investment of an individual, who is not a tax resident of Cyprus, in a mutual fund or partnership, operating in accordance with the provisions of the Open-ended Undertaking for Collective Investment Funds Law or in accordance with the provisions of the Alternative Investment Funds Law, does not create a PE for the individual in Cyprus with respect to his/her investment:

• Provided that the management of an Undertaking for Collective Investment in Transferable Securities (UCITS) and/or Alternative Investment Funds (AIF), that operates outside the Republic, by an individual that is a Cypriot tax resident, does not create/constitute a PE for the UCITS or the AIF.

Taxation of carried interest

Following the amendments of the ITL, a new addition has been made regarding the taxation of carried interest. Under the new amendment, the carried interest received by a Cyprus tax resident individual employed by one of the following will be taxed at a rate of 8%:

• An AIF management company
• A company to which the AIF management company has delegated the portfolio management or risk management function of the fund managed by the same fund management company
• A self-managed alternative investment fund

It is important to note that:

1. The above regarding taxation of carried interest will not be available to an individual that was a Cypriot tax resident for a period of three out of five tax years preceding the year of commencement of his/her employment and also to an individual who was a Cypriot tax resident during the year preceding the year of commencement of employment.
2. The above will be applicable only to an individual who upon his commencement of employment to the listed companies, becomes a Cypriot tax resident.
3. The individual should be a chief executive or remunerated as a chief executive of the abovementioned companies.
4. The above should be applicable provided that the net book value of the fund's assets exceeds the amount of the initial investment of the investors.
5. The above is available for each individual for 10 years in total in one or more employments, including the year of commencement and the year of termination of his/her employment.
6. The minimum tax to be paid per year is €10,000.
7. The income of the individual taxed in accordance with the above, is not subject to additional taxation.

In the case that the carried interest is paid in the form of titles, its value is equal to the market value of the granted titles at the date granted to the individual, less any amount paid for their acquisition.

Value Added Tax (VAT) Aspects

Investment management services of qualified investment funds, such as AIFs described above, are exempt from Cypriot VAT. Also, as per the relevant Circular asset "management services" provided to special investment funds are exempt from VAT when they are ancillary and consist of the following supplies:

(i) Investment management including the management of the risks associated with the operation of the investment funds

(ii) Administration inclusive among others of legal and fund management accounting services, customer inquiries, valuation and pricing (including tax returns), contract settlements (including certificate dispatch, record keeping)

(iii) Marketing

Management of the mutual funds VAT Exemption can be exceptionally beneficial and it is worth eligibility consideration prior to implementation since the specific features of the transactions are determinative. Input VAT Recovery of investment management services providers is an area requiring attention given the restriction on deducting input VAT even in cases where provided services are directed to non–European Union parties. VAT planning and transactional flow structuring is a pre-requisite for affected entities aiming to utilize optimization opportunities and minimize VAT costs.

In addition, following an amendment to the Special Contribution for the Defense Law, an individual, tax resident in the Republic, who receives dividends from an Undertaking for Collective Investment Fund, will be subject to Defense Tax at the normal rate of 17% on any dividends received from these funds.

Amendments to the legal regime governing Alternative Investments Funds

Following the publication of the new legislation (approved by the Cyprus Parliament on 10 July 2018), Law 131(I)/2014 regulating AIFs in Cyprus shall be repealed and replaced by the new legislation. The new legislation shall introduce some new provisions to further enhance the Cyprus funds Industry.

Registered AIFs

The new legislation introduces the registered AIFs (RAIFs) which aim to reduce the time and cost required in establishing an AIF in Cyprus. The RAIFs shall not require authorization by the Cyprus Securities and Exchange Commission (CySec) in order to commence with their operations provided that they are externally managed by an AIF Manager (AIFM) established in an EU Member State. There will be a notification obligation to CySec and the RAIF shall be included in a Register that will be maintained by CySec. It is important to note that the RAIFs shall be exclusively addressed to professional and/or well-informed investors.

The main characteristics of a RAIF will include:

• Option for umbrella structure
• No minimum capital requirements
• Open or closed ended
• Supervision only at the level of the AIFM
• May be structured as a common-fund, investment company with fixed or variable capital, or limited partnership
• Need to appoint a local depository

Limited Partnerships with legal personality

Another new provision is the introduction of limited partnerships with separate legal personality. This will allow parties to structure an AIF in the form of a limited partnership which may have a separate legal personality.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Limassol

• Philippos Raptopoulos
  philippos.raptopoulos@cy.ey.com

Ernst & Young Cyprus Limited, Nicosia

• Petros Krasaris
  petros.p.krasaris@cy.ey.com
• Panayiotis Tziongouros
  panayiotis.tziongouros@cy.ey.com
• Charalambos Prountzos
  charalambos.prountzos@cylaw.ey.com
• George Liasis
  george.liasis@cy.ey.com
• Simos Simou
  simos.simou@cy.ey.com
• Iacovos Kouppas
  iacovos.kouppas1@cylaw.ey.com

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ATTACHMENT

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