Investment Funds in Cyprus: Tax Aspects

During the past few years, the funds industry in Cyprus
has experienced significant growth (both in terms of value of assets and in
terms of number of funds and fund managers), resulting in the island
establishing itself as one of the major EU fund jurisdictions.

Cyprus’s strategic geographic position, stable
political system, attractive tax system, modernised AIF Law, combined with EU
and Eurozone memberships, have served to attract global funds and fund managers
alike.

From a tax perspective, establishing a fund in Cyprus
can have significant benefits for both the fund and its investors. We summarize
below some of the tax benefits available for Cyprus funds and their investors:

FUND TAXATION

Cyprus funds are:

Ø  Exempt
from tax if established as a tax transparent entity (i.e. partnership or common
fund).

Ø  Tax
resident if established as an investment company and if managed and controlled
in Cyprus.

o   
Net taxable profits are subject to income
tax at 12.5%.

o   
Effective tax rate could be reduced to 2.5%
via the use of Notional Interest Deduction.

o   
Profits from sale of shares, bonds and
other securities are exempt from income tax.

o   
Dividend income is exempt from income tax.

o   
Capital gains from the sale of foreign
immovable property are exempt from tax.

o   
No subscription tax on the net assets of
the fund.

o   
VAT exemption for fund management services.

o   
Wide network of double tax treaties
(currently with 65 countries)

INVESTOR TAXATION

Ø  No
withholding tax on dividends or on redemption of units for investors who are
not tax resident and domiciled in Cyprus.

Ø  No
deemed distribution provisions for investors who are not tax resident and
domiciled in Cyprus.

Ø  Tax
resident and domiciled investors are subject to a withholding tax of 17% on
dividends received.

Ø  Non-Cyprus
resident investors in a tax transparent fund will not deem the investors to
have a permanent establishment in Cyprus and as a result, any income they earn
from the fund will not be subject to Cyprus tax. It will only be subject to tax
in their country of tax residence.

We at Savva & Associates
are among the few providers in Cyprus experienced in the establishment
and administration of alternative investment funds and the most cost efficient
in delivering high level alternative investment fund services in Cyprus. Our
dedicated Investment Funds Division has extensive knowledge of financial
services, coupled with local legal and tax expertise, ensuring efficiency in
establishment, licensing and ongoing management of AIFs.

For further information on establishing a fund in
Cyprus, please contact us at info@savvacyprus.com