The Cyprus Investment Funds Association (CIFA) warns of negative consequences for the investment fund market from provisions of the proposed tax reform, emphasising the need for their withdrawal.
The Association's main objections focus on the need not to tax the profit resulting from the disposal of shares/units and on the provision through which the redemption of a share in a corporate investment fund is equivalent to a reduction in capital, resulting in taxation based on the 'On Extraordinary Contribution for the Defence of the Republic Law.'
In fact, regarding the second point, CIFA warns that this would constitute a disincentive for investments by tax residents of Cyprus in such investment funds.
As CIFA characteristically indicates, "the investment fund market should be made accessible and attractive to all investors regardless of their tax residence," emphasising that "Cypriot tax residents should not be discouraged from investing in investment funds."
- Read the CIFA memorandum in full below, translated from the orginal Greek :
As CIFA, we would like to submit our comments on the proposed bills, within the framework of the public consultation process, and specifically on the "Tax Reform" package of bills, as follows.
– Law amending the Income Tax Laws,
– Law amending the Extraordinary Contribution for the Defence of the Republic Laws,
– Law amending the Capital Gains Laws,
– Law amending the Tax Assessment and Collection Laws,
– Law amending the Tax Collection Laws,
– Law amending the Stamp Laws.
I. Introduction – Comment/suggestions submission area
We would like to clarify that the following comments and clarifications constitute the Association's positions regarding any impacts on the further development of the investment fund sector in Cyprus.
It is emphasised that any comments and observations are intended to maintain and/or improve the tax provisions as they apply to investment funds, investment fund managers and investors, tax residents within and outside Cyprus.
Therefore, we are commenting on specific provisions and not on the bills in their entirety.
Regarding comments and observations concerning investment funds/managers/investors as general taxpayers, the Association has not set its position and we expect other bodies and/or associations to make their positions kown accordingly.
We refer below for our comments on specific provisions.
II. Law amending the Income Tax Laws
Amendment to Article 8 of the Basic Law – (22) profit from the disposal of securities:
It is understood that the redemption of a unit or share in an open-ended or closed-ended collective investment scheme constitutes a disposal of a security.
Upon first reading of the provision, it is presumed that shares/units in investment funds cease to be securities.
The non-taxation of profit resulting from the disposal of shares/units is one of the most important measures concerning the taxation of investment funds and their investors.
We believe that the withdrawal of the reservation will have extremely negative consequences, since it will make investing in Cypriot investment funds unprofitable both for investors who are tax residents of Cyprus and for investors who are tax residents abroad .
Our proposal is to maintain the exemption from taxation of profits arising from the sale/redemption of securities, regardless of the legal form of the investment fund that issues them.
Maintaining this specific exemption is necessary to maintain tax incentives and attract investments in Cypriot investment funds.
Even if this specific amendment is withdrawn, the tax treatment of the redemption of shares/units should also be examined under the Law amending the Extraordinary Contribution for the Defence of the Republic Laws, as explained below.
III. Law amending the Extraordinary Contribution for the Defence of the Republic Laws
Proposed proviso to Article 3(2) (a) – The redemption of a share or unit in a collective investment scheme […] established in the form of a company constitutes a reduction of capital.
We express our disagreement with the proposed change in this specific form.
The change provides that the redemption of a share in a corporate investment fund is equivalent to a capital reduction, resulting in taxation as an Extraordinary Contribution.
It is emphasised that today redemption constitutes a sale of securities (i.e. no taxation arises).
Our disagreement is based on a number of reasons.
Initially, it is emphasized that this provision would constitute a disincentive for investments by tax residents of Cyprus in such investment funds.
As we have mentioned, the investment fund market should be made accessible and attractive to all investors regardless of their tax residence.
Cypriot tax residents should not be discouraged from investing in investment funds.
Changing an established tax practice that gains from redemption are exempt, as a disposal of a security, from full taxation as a dividend, may send the wrong messages and is not consistent with the stability of the Cyprus tax framework for investment funds, which is promoted to interested funds/managers/investors.
It should be noted that the proposed change completely ignores the nature of investment funds and in particular corporate structures that are primarily aimed at accessibility and direct investment and exit for investors.
Under no circumstances should an investment fund be equated with an ordinary limited liability company.
Both the purposes, the operational costs, and the supervision and transparency regime are diametrically different.
It should be noted that the "Acquisition" cannot be equated with a capital reduction as a legal act.
Redemption refers to the process of selling shares by investors back to the fund, at the current net asset value (NAV) and should be considered as a profit realised by the investor upon exiting the fund and not equated with a reduction in capital.
In addition, the proposed change is expected to create practical issues.
The proposed change highlights the need to impose an obligation to withhold the Extraordinary Contribution on fund managers.
This is expected to act as a deterrent to attracting managers to Cyprus. It is emphasised that at this stage, Cyprus is not a destination for large investment funds and managers, unlike other financial centres abroad.
An achievable goal is to attract funds and managers seeking reduced operating costs, which is not served by this specific provision .
Furthermore, the obligation to withhold the Extraordinary Contribution is expected to create additional practical difficulties for the promotion of Cypriot funds through clearing and settlement platforms, since the issue of the Extraordinary Contribution has always been a concern for these platforms.
Our proposal is that any imposition of a capital gains tax (both for actual dividend distribution and capital reduction) should not burden managers and/or investment funds.
At the same time, the EU promotes the increase in investments by European citizens in investment plans 'Incentivisation of Savings and Investments Accounts' precisely because of the supervised environment.
The proposed change is contrary to the specific design.
Finally, we recommend deleting the proposed change in its specific form and maintaining the practice that excludes profits arising from the redemption of investment fund shares from both Income Tax and Extraordinary Contributions.
Any proposed change should take into account both the potential impact on existing investors and the attraction of new funds/investors/managers, and a reasonable period of time should be allowed for the implementation of any measure.
IV. Law amending the Tax Assessment and Collection Laws
Amendment of article 7 of the basic law – (b) … obligation of [a partner of a partnership] to submit for each tax year, a tax return of the partnership's taxable income to the Tax Commissioner, by electronic or other means approved by him, and to state therein the names and addresses of the other partners, together with the amount of his share as taxable income in the said year.
This specific proposal cannot be practically applicable, especially to investment funds that will have the legal form of a cooperative. It is practically impossible for investors/Limited Partners to possess this information.
Such a provision would create extremely high operational/administrative costs for investments in cooperatives .
Furthermore, this provision may raise personal data protection issues.
We recommend the withdrawal of this provision for cases of cooperative investment funds.
V. Introduction of NAV taxation system
One of the association's proposals during the process of submitting proposals to the Economic Research Centre of the University of Cyprus (CypERC) was the imposition of an alternative method of taxation that would be imposed on the Net Asset Value (NAV), optionally for investment funds that are in the form of a common fund.
We understand that further promotion of the measure requires a thorough analysis of whether such a measure constitutes state aid. Due to the timetable of the public consultation, we reserve our position and will return with further comments and views on the issue.
VI. Other proposed measures
We have repeatedly submitted our proposals for improving the tax framework for investment funds in Cyprus to CypERC, without receiving any response.
(Source: InBusinessNews)
