Cyprus’s new law on alternative investment funds, Law 124(I)/2018 has now entered into effect following its publication in the official gazette. The new law repeals and replaces Law 131(I)/2014.
It introduces a new form of alternative investment fund, known as the registered AIF, or RAIF, with the aim of reducing the time and cost involved in establishing an AIF in Cyprus. RAIFs which are externally managed by an AIF Manager (AIFM) established in an EU Member State do not require authorization by the Cyprus Securities and Exchange Commission (CySEC) in order to operate in Cyprus; they are merely required to notify CySEC, which will maintain a register of RAIFs. RAIFs may not be marketed to retail investors, but only to professional or well-informed investors.
The RAIF structure offers great flexibility. RAIFs will be required to appoint a local depository but supervision will be only at the level of the AIFM: there is no minimum capital requirement and RAIFs may be open- or closed-ended and stand-alone or with an umbrella structure. They may take the form of a mutual fund, an investment company with fixed or variable capital, or a limited partnership, and the new law introduces the concept of limited partnerships with separate legal personality.
As a further incentive for funds to establish their operations in Cyprus, amendments have also been made to the Income Tax Law. Article 2 of the Income Tax Law has been amended to make clear that investment by a non-resident individual in a mutual fund or partnership operating in accordance with the provisions of the Open-ended Undertaking for Collective Investment Funds Law or the Alternative Investment Funds Law does not create a permanent establishment in Cyprus with respect to the investment. Similarly, the management by a Cyprus tax resident of a UCITS or AIF that operates overseas does not give rise to a permanent establishment in Cyprus for the UCITS or the AIF.
In addition, new provisions have been introduced regarding the taxation of carried interest, the share of the profits paid to the investment manager in excess of the amount that the manager contributes. The amending law introduces a new article 20B into the Income Tax Law providing that carried interest is taxed at the highly beneficial rate of eight per cent for the first 10 years, subject to a minimum EUR 10,000 tax liability per year, and subject to the following conditions:
- the individual is employed in a senior executive capacity by a self-managed AIF, an AIF management company, or a company to which the AIF management company has delegated the portfolio management or risk management function of the fund;
- the individual became a Cyprus tax resident when his employment with the company began, and was not a Cyprus tax resident in the year preceding the year in which the employment began, or for three or more of the five tax years preceding the year in which the employment began; and
- the net book value of the fund’s assets is greater than the initial investment by the investors.
The concessionary rate is available to an individual for 10 years in total in one or more employments, including the year of commencement and the year of termination. If the carried interest is paid in kind, the taxable value is the market value of assets concerned, less any amount paid for their acquisition.
Finally, Law 118(I) of 2018 amends the Special Contribution for Defence Law (Law 117(I)/2002) to provide that the rate of SDC tax payable by persons who are resident and domiciled in Cyprus in respect of dividends received from UCITS is 17 per cent.
For further information on this matter please contact Dimitris Papoutsis or your usual contact at Elias Neocleous & Co LLC.