The Cyprus Tax Laws have been amended with regard to the taxation of individuals working in the Fund Industry and incur carried interest and to further clarify the existing tax framework  for Alternative Investments Funds (AIFs) and Undertakings for Collective Investments in Cyprus (UCITs).

Special Mode of taxation for carried interest

Under new provisions introduced in the Cyprus Income Tax Laws, the carried interest accrued to an individual taxpayer from exercising employment in Cyprus in (i) an AIFM (ii) a self-managed AIF or (iii) a company to which the AIFM has delegated portfolio or risk management responsibilities in respect of the AIF under management, may, at the option of the individual taxpayer, be subject to taxation at the flat rate of 8% on amounts constituting carried interest, with a minimum tax payable of €10,000 per year, for a total period of 10 years. In the event of carried interest granted in the form of titles, the amount shall be determined in accordance with the market value of the titles at the date their ownership is transferred to the individual taxpayer less any acquisition costs borne by the individual. 

The individual taxpayer may opt to waive the right to the special mode of taxation and be subject to tax under the normal rules and rates of personal income tax; in such a case, the minimum tax payable shall not apply.

Under the new provisions, carried interest is defined as a profit share of the AIF, allocated directly or indirectly to the employees of the entities outlined in (i), (ii) and (iii) above, as a reward for the management of the AIF but it does not include any profit share in the AIF that results as a proportional allocation of any profit incurred by virtue of their investment i.e. any dividends accrued to the individual shall not be treated as carried interest and shall be taxed separately.

To safeguard from abuse, specific anti-avoidance provisions are introduced.

 a) The special mode of taxation is available to individuals that:

• were not Cyprus tax residents in any 3 (three) out of the last 5 (five) tax years that precede the year in which the employment commenced; or
• were not Cyprus tax residents in the year preceding the year in which the employment was commenced and their employment in Cyprus commenced prior to the entry into force of the new provisions
  
  and

• upon commencement of the employment, the individuals assumed Cyprus tax residency.

b) Not all individuals employed in an AIFM or an AIF or a company entrusted with portfolio or risk management for the AIF are eligible. The carried interest provisions are restricted to those categories of staff, including senior management, risk takers, control functions and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and those risk takers, whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage.

c) In order for the favorable rate to be applied, carried interest should be granted after the net asset value of the fund exceeds the amount of the initial investment by the unitholders.

Note: The same rules apply in respect of individuals involved in the management of UCITs funds.

The new provisions apply as of 30/7/2018.

Taxation of contractual funds (common funds and partnerships)

Under new provisions introduced in the Cyprus Income Tax Law 118(I)/2002 as amended, no permanent establishment is formed by investors for their investments in common funds established under the Open-Ended Undertakings for Collective Investment (UCI) Law of 2012 and common funds and partnerships established under the Alternative Investment Funds Law of 2014. As a result, common funds and partnerships are tax transparent with income from the said funds being apportioned to the Investors and taxed accordingly. 

The new provisions apply as of 30/7/2018.

Taxation of Cyprus tax resident and domiciled investors

Under new provisions introduced in the Special Contribution for the Defence Law 117(I)/2002, Cyprus tax resident and domiciled  individual investors will be subject to deemed dividend distribution at the rate of 17% instead of 3% previously applicable.

The amendment shall have no effect on investors (individuals or companies) that are neither Cyprus tax residents nor Cyprus domiciled as such investors shall be completely exempt from the provision.

It is clarified that the provision only applies in respect of funds that are set up in a legal entity/company form and does not apply for common funds or partnerships.

The new provisions apply as of 30/7/2018.

All content prepared by KPMG Cyprus.