The Alternative Investment Funds Law 124(I)/2018, to the extent amended (hereinafter, the ‘’AIF Law’’) defines alternative investment funds as any collective investment undertakings, including investment compartments thereof, which, collectively:

• raise capital from a number of investors, with a view to investing it in
  accordance with a defined investment policy for the benefit of those
  investors, and
• do not require authorisation pursuant to section 9 of Law 78(I)/2012, as
  amended (hereinafter, the ‘UCI Law’), or pursuant to the legislation of
  another member state that harmonises the provisions of Article 5 of the
  Directive 2009/65/EC, as amended.

The AIF Law allows for three types of AIFs to be established in Cyprus which are as follows:

• Alternative Investment Funds with Limited Number of Persons (50) (AIFLNPs)
• Alternative Investment Funds with Unlimited Number of Persons (AIFs)
• Registered AIFs (RAIFs)

The various legal forms in which either type of AIFs can manifest are as follows:

AIFLNP:

• Variable Capital Investment Company (VCIC)
• Fixed Capital Investment Company (FCIC)
• Limited Partnership (LP)

AIF/RAIF:

• VCIC
• FCIC
• Common Fund (CF)
• LP

UCITS:

The UCI Law defines UCITS as undertakings the sole object of which is the collective investment in transferable securities and/or other liquid financial instruments as referred to in section 40 (1) of the UCI Law, of capital raised from the public, which operate on the principle of risk-spreading, and the units of which are, at the request of investors, redeemed or repurchased, directly or indirectly, out of these undertakings’ assets.

UCITS can take the following legal forms:

• CF
• VCIC

Taxation of Funds

Funds which are opaque for tax purposes and which are managed and controlled in Cyprus are tax resident in Cyprus and are subject to the general provisions of the Cyprus tax framework.

In the case of funds which have compartments, each compartment is assessed separately for tax purposes subject to the provisions of the law.

Under circumstances and depending on the legal form of the fund, some funds may be transparent for tax purposes.

Additional key provisions which are relevant to funds are set out below:

Sale of Fund Units

The subscription, redemption, conversion or transfer of a fund’s units should be exempt from Cyprus stamp duty.

No creation of a permanent establishment

Based on the Cyprus tax legislation no Cyprus permanent establishment will be deemed to arise:

i. for non-Cyprus resident investors as a result of investment into Cyprus tax-transparent investment funds, or,
ii. as a consequence of the management from Cyprus of non-Cyprus investment funds.

Management services

The management fee charged for the provision of collective management services to investment funds is exempt from VAT, provided certain conditions are met.

Carried interest / performance fee for AIF and UCITS fund managers

Certain employees and executives of the following investment fund management companies or internally managed investment funds may opt for a different mode of personal taxation:

• Alternative Investment Fund Managers authorised under the Alternative Investment Fund Managers Law 56(I)/2013, as amended (hereinafter, the
  ‘AIFM Law’);
• Internally managed AIFs authorised under the AIFM Law;
• UCITS Management Companies authorised under the UCI Law; and
• Internally managed UCITS authorised under the UCI Law.

Subject to conditions, their variable employment remuneration which is effectively connected to the carried interest of the fund managing entity may, through an annual election, be separately subject to Cyprus tax at the flat rate of 8%, with a minimum tax liability of €10.000 per annum. This special mode of taxation is available for a period of 10 years.

As from 1 March 2019 the General Healthcare System Law of 2001 (GHS) will come into effect.

Employees, employers, Individuals and the government will contribute to the GHS. The contributions will be deducted from the entire earnings of the individuals (including
dividends, interest and rental income) up to a maximum of €180.000.

The following table gives the amount or rate of duty payable on certain documents. Transactions which fall within the scope of reorganizations are exempt from stamp duty.Also, documents relating to assets situated outside Cyprus or business affairs that take place outside Cyprus are exempt from stamp duty.

Nature of documents

Social insurance and other contributions are calculated at the following rates on employee’s gross weekly/monthly emoluments.

Limits

The following are the upper limits on employee’s gross emoluments:

Deadline for Contribution Payments

The transfer fees are paid by the acquirer to the Department of Land and Surveys on transfers of immovable property on values estimated by the Department of Land and Surveys.

Immovable Property Transfer Fees

Transfers relating to properties that are subject to VAT will be exempt from the above transfer fees and transfers relating to properties that are not subject to VAT will be eligible for 50% exemption from the above transfer fees.

In the case of free transfers of property between the following parties, the transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:

• from parents to children Nil
• between spouses 0,1%
• between third degree relatives 0,1%
• to trustees €50

No immovable property transfer fees are payable in the case of a qualified reorganization, a qualified loan restructuring or in the context of bankruptcy, liquidation and disposal of mortgaged immovable property by the lender.

Special Defence contribution is imposed on dividend income, ‘passive’ interest income and ‘passive’ rental income earned by companies tax resident in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled.

Prior to 16 July 2015, individuals were subject to special defence contribution if they were tax resident in Cyprus. As from 16 July 2015, individuals are subject to special defence contribution if they are both Cyprus tax resident and Cyprus domiciled.

An individual is domiciled in Cyprus for the purposes of special contribution for defence if he/she has a domicile of origin in Cyprus per the Wills and Succession Law(subject to exemptions)or if he/she has been a tax resident in Cyprus for at least 17 out of the 20 tax years immediately prior to the tax year of assessment. Anti-avoidance provisions apply.

The special defence contribution is charged at the rates shown in the table below:

Notes:

• Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are excluded from all taxes, unless they are indirectly declared after the lapse of four years from the end of the year in which the profits were generated, in which case they may be subject to special contribution for defence at 17%.
  Dividends which emanate directly or indirectly out of such dividends on which special contribution for defence was previously suffered are exempt.

This exemption does not apply if:

1. more than 50% of the paying company’s activities result directly or indirectly in investment income and
2. the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17%.

• Such interest income is subject to income tax / corporation tax.

Deemed Dividend Distribution

A Cyprus tax resident company is deemed to have distributed as a dividend 70% of its after tax (note 1) accounting profits (as adjusted for special contribution for defence purposes-note 2).

Such a deemed dividend distribution is reduced with payments of actual dividends paid during the relevant year the profits were generated or paid during the two following years.

On the remaining net amount (if any) of deemed dividend 17% special contribution for defence is imposed to the extent that the ultimate direct/ indirect shareholders of the company are Cyprus tax resident individuals.

When an actual dividend is paid after the deemed dividend distribution date, then if special contribution for defence is due on such a dividend, the tax is imposed only on the amount of the actual dividend paid which is over and above the dividend that was previously deemed to have been distributed and previously suffered special contribution for defence.

Notes:

1. The term ‘’tax’’ in addition to corporation tax includes also the special defence contribution, the capital gains tax and any foreign taxes suffered.
2. A number of adjustments to the accounting profit are required for deemed distribution purposes, including for tax years 2012, 2013 and 2014 if the company has acquired in those years plant, machinery or buildings (excluding private motor vehicles) for business purposes, the cost of these assets will be deductible against the accounting profits.

Disposal of Assets to Shareholder at Less Than Market Value

When a company disposes of an asset to an individual shareholder or a relative of his up to second degree or his spouse for a consideration less than its marke value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision does not apply for assets originally gifted to the company by an individual shareholdei or a relative of his up to second degree or his spouse.

Company Dissolution

The cumulative profits of the last five years prior to the company’s dissolution which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to special contribution for defence at the rate of 17%.

This provision does not hold in the case of dissolution under a Reorganisation.

Reduction of Capital

In the case of a reduction of capital of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity will be considered a: dividends distributed subject to special defence contribution at the rate of 17% after deducting any amounts which have been deemed as distributable profits.

The above provisions apply only to the extent that the ultimate shareholder: (direct or indirect) are Cyprus tax resident individuals.

Value Added Tax is imposed on the supply of all goods and services in Cyprus, on the acquisition of goods from EU Member States and on the imposition of goods from third countries.

VAT Registration

Every individual or company is obliged to register to VAT if:

• at the end of any month, the value of the taxable supplies recorded in the last 12 months exceeds €15.600.
• at any point in time the value of the taxable supplies are expected to exceed €15.600 in the next 30 days.
• provides services to a VAT registered person within European Union with nil registration threshold.
• offers zero rated supplies of goods or services.
• acquires a company on a going concern basis.
• a taxable person from abroad makes distance sales with registration threshold of €35.000.
• is involved in the acquisition of goods from other EU member states (relates to persons who offer exempt supplies of goods and services or are non for profit organisations) with registration threshold of €10.250.

VAT on immovable property

1. Leasing of immovable property. VAT at the standard rate must be charged on lease of immovable property when the lessee is a taxable person and is engaged in taxable activities by at least 90%. The lessor has the right to opt not to impose VAT on the specific property. The option is irrevocable.
2. Sale of non-developed building land. VAT at the rate of 19% must be charged on the sale of non-developed building land, as from 2 January 2018. Non-developed building land is defined as any land intended for the construction of one or more structures in the course of carrying out a business activity. No VAT will be imposed on the purchase or sale of land located in a livestock zone or areas which are not intended for development such as zones/areas of environmental protection, archaeological
   and agricultural.
3. Repossession of immovable property by financial institutions. VAT must be accounted under the reverse charge provisions on transactions relating to transfers of immovable property during the process of loan restructuring and for compulsory transfer to the lender, as from 2 January 2018.
4. Leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property. As from 1 January 2019 leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property are considered to be supplies of goods. They also become subject to VAT at the standard rate.

Intra-community trading of goods and services

Businesses that undertake intra-community trading, i.e. Acquisitions and sales of goods and supply of services from/to EU member states need to complete the following forms:

• Intra-Community Acquisitions: (a) Intrastat-Arrival of goods, (b) Inclusion in the VAT return on a total basis.
• Intra-Community Supplies: (a) Intrastat-Departures of goods, (b) Recapitulative statement for supplies of goods and services (VIES form), (c) Inclusion in the VAT return on a total basis.

INTRASTAT forms are submitted electronically only to the VAT authorities not later than the tenth (10) days from the end of the related month.

Imposition of the reduced rate of 5% on the renovation and repair of private residences

As from 4 December 2015 the renovation and repair of used private residences (for which a period of at least three years has elapsed from the date of their first use) is subject to VAT at the reduced rate of VAT of 5%, excluding the value of materials which constitute more than 50% of the value of the services.

In addition as from 4 December 2015 the renovation and repair of old private residences (for which a period of at least three years has elapsed from the date of their first use) and which are used as the place of residence of vulnerable groups or residences that are used as the place of residence and which are located in remote areas are subject to VAT at the reduced rate of VAT of 5%.

Imposition of the reduced rate of 5% on the acquisition and/or construction of residences for use as the primary and permanent place of residence.

The reduced rate of 5% applies to contracts that have been concluded from 1 October 2011 onwards provided they relate to the acquisition and/ or construction of residences to be used as the primary and permanent place of residence for the next 10 years.

The reduced rate of VAT of 5% applies on the first 200 square meters. The standard rate applies for the remaining square meters as determined based on the building coefficient.

The reduced rate is imposed only after obtaining a certified confirmation.

The eligible person must submit an application on a special form, which will state that the house will be used as the primary and permanent place of residence. The applicant must attach a number of documents supporting the ownership rights on the property and evidencing the fact that the property will be used as the primary and permanent place of residence. The application must be filed prior to the actual delivery of the residence to the eligible person.

As from 8 June 2012 eligible persons include residents of non EU Member States, provided that the residence will be used as their primary and permanent place of residence in the Republic.

The documents supporting the ownership of the property must be submitted together with the application. The documents supporting the fact that the residence will be used as the primary and permanent place of residence (copy of telephone, water supply or electricity bill or of municipal taxes) must be submitted within six months from the date on which the eligible person acquires possession of the residence.

A person who ceases to use the residence as his primary and permanent place of residence before the lapse of the 10 year period must notify the Commissioner of
Taxation, within thirty days. The person must also pay the difference resulting from the application of the reduced and the standard rate of VAT attributable to the remaining
period of 10 years for which the property will not be used as the main and primary place of residence.

Persons who have already acquired a residence on which the reduced VAT rate was imposed, can re-apply and acquire a new residence on which the reduced VAT rate will be imposed, irrespective of whether the 10 year prohibition period for using the initial residence has lapsed or not. A condition for this to apply is that in case the 10 year period of using the residence as the main and permanent place of residence has not lapsed, the persons must return to the Tax Department the difference in the VAT between the standard and reduced VAT rates applicable at the time of the acquisition or construction of the residence.

Persons who make a false declaration to benefit from the reduced rate are required by law to pay the difference of the additional VAT due. Furthermore, the legislation provides that such persons are guilty of a criminal offence and, upon conviction, are liable to a fine, not exceeding twice the amount of the VAT due, or imprisonment up to 3 years or may be subject to both sentences.

VAT Returns

VAT returns are submitted electronically, quarterly and the payment of the VAT must be made by the 10th day of the second month that follows the month in which the tax period ends.

VAT Penalties and interest

Capital gains tax is imposed at the rate of 20% on:

• gains from the disposal of immovable property situated in the Republic
• gains from the disposal of shares of companies not listed on a recognised stock exchange which own immovable property situated in Republic. In this case, the gain is calculated exclusively on the basis of the gain from the immovable property. The value of the immovable property is its market value at the time the shares sold.

The taxable gain is the difference between the sale proceeds and the original cost of the property plus improvements as adjusted for inflation up to the date of disposal on the basis of the consumer price index in Cyprus. If the disposed property was acquired before 1 January 1980 its original cost is deemed to be the value of the property as at 1 January 1980. Any expenditure incurred for the production of the gain e.g. legal fees, is deducted from the sale proceeds. The following expenses however are not deductible:

• Immovable property tax
• Immovable property fees
• Sewerage fees

Lifetime Exemptions to Individuals:

Gain 

On the disposal of any property €17.086

On the disposal of agricultural land by a farmer €25.629

On the disposal of own residence (under presumptions) €85.430

The above exemptions are given only once and not for every disposal.

No individual can claim all three exemptions but can claim one of these exemptions whichever is the higher.

Exemptions

The following disposals of immovable property are not subject to Capital Gains Tax:

• Transfers arising on death.
• Land as well as land with buildings acquired during the period 16 July 2015 - 31 December 2016 provided that the immovable property was acquired through a purchase agreement and not through an exchange or donation, at market value, from a non-related party. The exemption does not apply to disposals of immovable property that have been acquired under foreclosure procedures.
• Gifts between spouses, parents, to children and between relatives up to third degree of kindred.
• Gifts to a company where the company’s shareholders are members of the donor’s family and the shareholders continue to be members of the family for five years after the day if the transfer.
• Gifts by a family company to its shareholders provided such property was originally acquired by the company by way of gift and given that the ownership will remain in the shareholder’s ownership for at least three years.
• Gifts to charities and the Government.
• Transfers as a result of reorganisations.
• Exchange or disposal of immovable property under the Agricultural Land (Consolidation) Laws.
• Expropriations.
• Transfer of property as a settlement by court decision, between ex-husband and wife.
• Transfer of property of a missing person during the administration of such property.
• Exchange of properties, provided that the whole of the gain made on the exchange has been used to acquire the other property. The gain that is not taxable is deducted from the cost of the new property, i.e. the payment of tax is deferred until the disposal of the new property.

As from 24th March 2010, the Tonnage Tax System (TTS) was introduced with the Merchant Shipping (Fees & Taxing Provisions) Law 44(I) of 2010 with effect as from 1 January 2010.

The new TTS covers Maritime Transport activities offered in international shipping, namely Ship owning, Ship management (including Crew Management and/or Technical Management) and Chartering.

The legislation allows non community vessels to enter the tonnage tax regime provided the fleet is composed by at least 60% community vessels. If this requirement is not met, then non community vessels can still qualify if certain criteria are met. The legislation includes an “all or nothing” rule, meaning that if a shipowner/ charterer/ shipmanager of a group elects to be taxed under the Tonnage Tax regime, all shipowners/ charterers/ shipmanagers of the group should elect the same.

Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.

The tonnage tax for a qualifying ship owner and charterer is calculated on the net tonnage of a ship in accordance with the rates outlined in the table:

Notes:

1. The exemption also applies to bare boat charterer of a vessel flying the Cyprus flag under parallel registration.
2. The law grants the exemption provided that the option to register for Tonnage Tax is exercised for all vessels and provided a composition requirement is met: at least 25% (reduced to 10% under conditions) of the net tonnage of the vessels owned or bare boat chartered in.
3. In order to qualify shipmanagers must satisfy the below additional requirements:

• Maintain a fully-fledged office In Cyprus with personnel sufficient in number and qualification
• At least 51% of all onshore personnel must be community citizens
• At least 2/3 pf the total tonnage under management must be managed within the community (any excess of 1/3 is taxed under the corporation tax).