Cyprus is continuing to upscale its legal, regulatory and tax framework in an efort to keep the jurisdiction at the forefront of fund managers’ and investors’ minds.
The new legislation constitutes a ground-breaking development for Cyprus Investment Funds as it incorporates a combination of provisions influenced by the respective legislative frameworks of other jurisdictions exceling within the investment funds industry.
Registered AIFs (RAIFs)
A new development is the introduction of RAIFs resulting to a drastically time efficient and more affordable way for establishing AIFs in Cyprus.
The RAIF has the characteristics and structuring flexibilities of regulated AIFs managed by an authorised AIFM, except that RAIFs are not subject to authorization and supervision by the Cyprus Securities and Exchange
Commission (CySEC) as with AIFs. So, in order for RAIFs to commence operations, they need to be externally managed by an Alternative Investment Fund Manager (AIFM) established in Cyprus or within another EU Member State. Instead, the establishment of a RAIF will need to be notified to the CySEC and be included in a special register that shall be maintained to this end.
As for RAIFs which are structured as limited partnerships, these may also be externally managed by managers other than AIFMs (i.e. Investment Firms, UCITS Management Companies). In such a case, the RAIF must necessarily be closed-ended and invest in illiquid assets.
So, the key characteristics of RAIFs are:
- Appointment of local depository.
- Option for umbrella structure with multiple investment compartments.
- Structured as either a common fund or an investment company of variable or fixed capital or a limited partnership.
- Exclusively addressed to professional and/or well informed investors.
- Supervision at the level of the AIFM managing the RAIF(s).
- Be open or closed ended.
- No minimum capital requirements.
AIFs structured as Limited Partnerships with inherent legal personality
Another significant new provision is the option for structuring an AIF as a limited partnership with separate legal personality i.e. compared to the AIFs structured as traditional limited partnerships.
Amendments to the related Tax Laws
New provisions have been introduced in the Cyprus tax legislation relating to the taxation of investment funds. The new provisions enhance further the already competitive tax framework of Cyprus applicable for investment funds, fund managers and investors.
Special mode of taxation for carried interest / performance fee for AIF and UCITS fund managers
Certain employees and executives of investment fund management companies or internally managed investment funds may opt for a new mode of personal taxation.
Subject to conditions, the new law provides for the introduction of an optional, special mode of taxation for the variable fee/employment remuneration of fund managers’ (when the fee is charged based on the profitability of the organization), providing taxation at the flat rate of 8%, with a minimum tax liability of Euro 10.000 per annum.
The new mode of taxation is available for a period of 10 years in total, subject to the annual election of the individual. The new provisions aim to enhance the already competitive Cyprus tax framework for fund managers.
No permanent establishment issues
A new addition has been made to the definition of the term ‘permanent establishment’ (PE) in the Cyprus income tax legislation. In particular, no PE will be deemed to arise in Cyprus in cases of:
- investment into Cyprus tax-transparent investment funds by non-resident investors and
- management from Cyprus of non-Cyprus investment funds.
The above income tax law amendments safeguard against uncertainties in relation to such cases.
Each compartment is treated as a separate taxpayer
According to the law, each compartment of an AIF or UCITS should be treated as a separate taxpayer thus further facilitating the effective operation of Cyprus investment funds via multiple compartments, in accordance with international fund industry standards.
The services provided by the Investment Manager and Fund Administrator are not subject to Cyprus VAT.
As per the relevant VAT circular, asset management services provided to special investment funds are exempt from Cyprus VAT and in particular those consisting of:
- Investment management including the management of the risks associated with the operation of the investment funds.
- Administration services, including legal services and fund management accounting services, customer services, valuation services, record keeping, income allocation services etc.
- Marketing .
In addition to the above, the said VAT circular clarifies that Management companies or Self-managed AIFs may under certain circumstances, assign to third parties, a specific and essential part of the management which, is
either compulsorily assigned on the basis of the UCITS legislation or voluntarily in the case of a self-managed AIF, for the purposes of the efficient exercise of their operations. The VAT treatment of these services, whether provided in the form of subcontracting of the total of the administrative aspects of management or which comprise a specific and essential part of the management, is also exempt from the imposition of Cyprus VAT.
Therefore, it is evident that VAT planning and transactional flow structuring is a pre-requisite for affected entities aiming to utilize optimization opportunities and minimize VAT costs.