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:
(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.
The same rules apply in respect of individuals involved in the management of UCITs funds.
The new provisions apply as of 30/7/2018.