The Use of Cyprus Alternative Investment Funds in Family Office Structures

Published on June 12, 2021
The Use of Cyprus Alternative Investment Funds in Family Office Structures
The Alternative Investment Fund (“AIF”) sector in Cyprus has continued its recent growth with the latest figures (for the quarter ended 31 December 2020), released by the Cyprus Securities & Exchange Commission, showing total assets under management reaching EUR 8.58 billion (recording a 3.8% increase compared to the 4th quarter of 2019 and 10.3% increase since the 3rd quarter of 2020). The majority of these (around 74.9%) are invested outside Cyprus with the main investment sectors being private equity and real estate. Investment in specific sectors would also include Energy, Sustainable Investments, Shipping, Fintech and Cryptocurrencies.In this brief article, we discuss how a Cyprus AIF can be used by family offices and by multi-family offices.As wealthy families grow, both in terms of size of wealth and in the number of family members, the need for the professional management of their wealth is becoming a prerequisite. This is typically achieved either by the establishment of a family office or by engaging a 3rd party multi-family office.Thereafter the family office will typically assist wealthy families in creating the optimal legal/tax structures, reduce dependence on the head of the family, plan for the future and assist with the management of the family’s investments.The AIF (Alternative Investment Fund) structure has a number of natural advantages as a vehicle for managing family wealth. The use of a Cyprus AIF in a family office structure can prove a very attractive solution as the AIF can provide some very important benefits, not available in other structures. For example:
  • Regulated vehicle – provides investors (i.e., the family members) with transparency, protection and in general “peace of mind” in respect to the legal framework and the rights and obligations of investors.
  • Segregated investment compartments (i.e., sub-funds) – the possibility to create various sub-funds below an AIF can allow the family office, for example, to separate assets by type, jurisdiction, investors, etc.
  • Investment restrictions – there are no significant restrictions as to the type of assets an AIF may hold and minimal investment diversification rules (assuming all investors qualify as well-informed).
  • AIF Taxation – the AIF, if it is setup as an investment company, should qualify as tax resident in Cyprus and as a result be entitled to the benefits offered by the wide network of double tax treaties available in Cyprus. Moreover, the AIFs taxable profits (if any) will be subject to a corporate tax rate of 12.5% (can be reduced to 2.5% via the notional interest deduction).
  • Investors – the details of investors are not disclosed to the Registrar of Companies and as a result, a level of anonymity may be maintained. Moreover, investors who are not domiciled and tax resident in Cyprus will not suffer any withholding tax on distributions from the AIF or on any redemptions.
Fund Taxation benefits: The main taxation benefits for Cyprus Funds are as follows:
  • Profits from sale of shares, bonds and other securities are exempt from income tax.
  • Dividend income is exempt from income tax.
  • No subscription tax on net assets of funds.
  • Net taxable profits are subject to income tax at 12.5%.
  • Effective tax rate could be reduced to 2.5% via the use of Notional Interest Deduction.
  • No capital gains tax for the sale of immovable property situated outside Cyprus or from sale of shares of foreign property companies.
  • Each AIF compartment is taxed as a separate taxpayer.
  • VAT exemption for fund management services.
  • A wide network of Double Tax Treaties (currently with 65 countries).
Even though, the tax treatment of income earned by investors will primarily depend upon their tax residency, the main taxation benefits for the investors are as follows:
  • No withholding tax on dividends or on redemption of units for investors who are not tax resident and domiciled in Cyprus.
  • Tax resident and domiciled investors are subject to a withholding tax of 17% on dividends received.
  • No deemed dividend distribution tax for investors who are not tax resident and domiciled in Cyprus.
  • 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.
   

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