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Why Fund Managers choose Cyprus as their place of employment?

On 10th July 2018 the Parliament of the Republic of Cyprus passed significant amendments to the Law 131(I)/2014 on Alternative Investment Funds (AIFs).

The amendments are giving emphasis to the introduction of the Regulated Alternative Funds (RAIFs).

As a result of these, the Cyprus tax legislation introduced new provisions applicable to fund managers.

The new tax legislation provides the choice to fund managers who relocate in Cyprus for Employment to select whether they wish to be taxed under the current tax regime or:

  • Their variable remuneration to be taxed using a rate of 8%
  • For a period of 10 years
  • Provided that the total tax liability will not be less than 10,000 euro.

Under the current tax regime there are two main tax reliefs for individuals that relocate to Cyprus for employment. These are:

  • For a period of 5 years there is a 20% additional tax relief of their remuneration with a maximum amount of 8.550 euro annually. This relief applies in the tax year following the year of the commencement of employment.
  • For a period of 10 years in the case where the employment income exceeds 100,000 euro there is an additional tax relief of 50%

The table below calculates the tax liabilities under the two methods using hypothetical employment income figures:

 

 

Employment Income = 70.000 euro, and

Employment Income = 110.000 euro, and

variable remuneration = 20.000 euro

variable remuneration = 20.000 euro

Current Tax Regime’s Liability (euro)

16.907

11.149

Choice of new tax regime – Tax Liability (euro)

14.5

28.501

 

As shown on the table above in the example where the employment income is 70,000 euro and the variable remuneration amounts to 20,000 euro it will be more beneficial for the fund manager to choose the tax relief available under the new tax regime giving a tax liability of 14,500 euro or 16, 11 % of the total income.

In the second example, where the employment income is 110,000 euro and the variable remuneration 20,000 euro, it will be beneficial for the fund manager to be taxed under the existing tax regime as the tax liability is 11.149 or 8, 6% of the total income.

It will therefore be advisable for fund managers to seek professional tax advice before they choose any of the two methods.

The non taxable income in Cyprus is currently 19,500 euro and it is most probably the highest in Europe. The tax rates which are applicable to individuals are:

 

Chargeable Income

Tax rate (%)

Accumulated Tax (euro)

First 19.500 euro

Nil

Nil

From 19.501 – 28.000 euro

20

1.7

From 28.001 – 36.300 euro

25

3.775

From 36.301 – 60.000 euro

30

10.885

Over 60.000 euro

35

21000+

 

The Chargeable Income is calculated by deducting from the Gross Remuneration any additional tax reliefs such as the two main tax reliefs which were analysed above for individuals that relocate to Cyprus for employment. In addition, the individuals can deduct subject to a maximum amount of 1/6 of the remuneration, the employee social insurance contributions and if applicable the contributions to medical fund (maximum 1, 5% of remuneration), pension and provident fund (maximum 10% of remuneration) and life insurance premiums (maximum 7% of the insured amount).

The amendments to the Law 131(I)/2014 on Alternative Investment Funds (AIFs) are giving emphasis to the introduction of the Regulated Alternative Investment Funds (RAIFs).

The main characteristics of RAIFs are the following:

  • Must be registered with the Cyprus Securities and Exchange Commission (CySec) but they will not be regulated
  • Externally managed
  • Addressed only to professional and well informed investors
  • Regulatory documents clearly state that it is under the specific AIFs Law
  • Required to appoint a Cyprus based depositary
  • No minimum Capital requirements
  • Can operate as open or closed ended funds and operate as an umbrella with multiple investment compartments, as long as this is mentioned in their regulatory documents. Each compartment will be taxed separately.
  • Can be set up as a mutual fund, investment company or a partnership

The amendments to the tax legislation in combination to the recent amendments of the legislation relating to investment funds in Cyprus is giving the opportunity to professional individuals to exercise their employment in a European Country which provide high standard professional services and enjoy the tax benefits offered to them by the Cyprus Tax Legislation.