Single family Fund with CY personal residency

[TRGali]

Hi,

I am heading the route of creating a closed/single family fund (it would actually be my personal money in the fund, no other family investor) taxed at 0%, which would be managed by a UAE single family office run by myself (will invest in listed & regulated derivatives). I am tax resident in CY.

- it could be a EU fund, I think in Luxembourg or NL for instance, being tax transparent / 0% tax. How do you think would be the taxation approach of Cyprus towards dividend extracted from such tax transparent fund? Dividends being tax free in CY (if we exclude gesy contributions) but the fund is defined as tax transparent in its country of origin (would CY disregard the fund and try to tax me on personal income?).

- Alternatively, would you recommend incorporation of such an unregulated fund possible in another jurisdiction? Are these possible in the Cayman without much yearly hassle for instance for single family fund?

- There is a possibility that CY might claim PE of the UAE family office due to me being the director of it. As this is not the entity that shows profit, I can go with that risk. Would that also bring a risk for taxation of the fund's profit ?

 

[Jerry1911]

Why not just set up a limited company and invest the funds that way?

 

[TRGali]

Mostly because the 0% tax solutions for LTD's seem to have either disappeared or lost their appeal (I don't want to incorporate in the exotic islands where registered agents actually have control of the company), so I am trying to find a long term stable setup. Or do I miss something about a ltd setup ?

 

[Jerry1911]

Mostly because the 0% tax solutions for LTD's seem to have either disappeared or lost their appeal (I don't want to incorporate in the exotic islands where registered agents actually have control of the company), so I am trying to find a long term stable setup. Or do I miss something about a ltd setup ?

There is no tax on capital gains in Cyprus, you're overcomplicating it.

 

[EliasIT]

Mostly because the 0% tax solutions for LTD's seem to have either disappeared or lost their appeal (I don't want to incorporate in the exotic islands where registered agents actually have control of the company), so I am trying to find a long term stable setup. Or do I miss something about a ltd setup ?

Use nominees like they are described in the article you find in mentor group gold, so you won't have such troubles if setup correctly and you can enjoy 0% tax.

 

[TRGali]

There is no tax on capital gains in Cyprus, you're overcomplicating

Ok maybe, but I don't understand your point... how do you achieve 0% at corporate level ?

Elias, yes I am aware of the nominee possibilities, I am regular of the forum and have been a few times in the mentor group. But I do not feel the nominee thing really helps me understanding better the answer to my questions.

 

[Jerry1911]

how do you achieve 0% at corporate level ?

See this: Cyprus - Corporate - Income determination

 

[CyprusLaw]

Hi,

I am heading the route of creating a closed/single family fund (it would actually be my personal money in the fund, no other family investor) taxed at 0%, which would be managed by a UAE single family office run by myself (will invest in listed & regulated derivatives). I am tax resident in CY.

- it could be a EU fund, I think in Luxembourg or NL for instance, being tax transparent / 0% tax. How do you think would be the taxation approach of Cyprus towards dividend extracted from such tax transparent fund? Dividends being tax free in CY (if we exclude gesy contributions) but the fund is defined as tax transparent in its country of origin (would CY disregard the fund and try to tax me on personal income?).

- Alternatively, would you recommend incorporation of such an unregulated fund possible in another jurisdiction? Are these possible in the Cayman without much yearly hassle for instance for single family fund?

- There is a possibility that CY might claim PE of the UAE family office due to me being the director of it. As this is not the entity that shows profit, I can go with that risk. Would that also bring a risk for taxation of the fund's profit ?

This structure would not be deemed to be a fund, but a regular company. You are not pooling funds from investors, you are simply investing your money through an SPV.

 

[Don]

Hi,

I am heading the route of creating a closed/single family fund (it would actually be my personal money in the fund, no other family investor) taxed at 0%, which would be managed by a UAE single family office run by myself (will invest in listed & regulated derivatives). I am tax resident in CY.

- it could be a EU fund, I think in Luxembourg or NL for instance, being tax transparent / 0% tax. How do you think would be the taxation approach of Cyprus towards dividend extracted from such tax transparent fund? Dividends being tax free in CY (if we exclude gesy contributions) but the fund is defined as tax transparent in its country of origin (would CY disregard the fund and try to tax me on personal income?).

- Alternatively, would you recommend incorporation of such an unregulated fund possible in another jurisdiction? Are these possible in the Cayman without much yearly hassle for instance for single family fund?

- There is a possibility that CY might claim PE of the UAE family office due to me being the director of it. As this is not the entity that shows profit, I can go with that risk. Would that also bring a risk for taxation of the fund's profit ?

Establishing a fund might be an overkill for you. You might be just as good with an Estonian limited partnership with an established PE in Cyprus.
This way you can avoid auditors and submitting financial reports to Cyprus authorities.
Also, no need to submit financial reports in Estonia.
Profits can be freely redistributed to the partners, as Cyprus PE profits are exempt from tax in Estonia.
This is most suitable for trading gains that qualify as exempt in Cyprus, e.g., not for crypto, or commodities.
The other type of income, such as crypto trading, you could structure under Estonia (not taxed until not withdrawn). Estonia also allows you to avoid exit tax if you return the assets to Estonia within 12 months, so the profits from Estonia could be temporarily withdrawn and, e.g., moved to its Cyprus PE for tax-free trading.

Cyprus also has an RAIF structure. https://www.pwc.com.cy/en/industries/assets/registered-alternative-investment-funds.pdf
A RAIF is subject to 12.5% of corporate tax based on the net profits results and does not have any charges on taxes that relate to the net assets of the fund.

Similar regulations are also in Estonia (tax transparent limited partnership fund), with slightly fewer limitations.
It normally consists of two entities:
1) Fund manager (e.g., private limited company). Pays Estonian corporate tax only on the distribution of profits.
2) The limited partnership trust fund. The fund is not a tax resident in Estonia but also not a non-tax resident - it's a hybrid structure.
Within the meaning of the Income Tax Act, the trust fund is not an income tax payer. The trust fund is exempt from income tax withholding obligations. If the trust fund earns a profit, then the distribution of dividends or the making of equity payments in excess of the contributions are not subject to taxation by the trust funds. Trust fund investors are taxed in the same way as when the same trust fund is made directly by the respective investment company, i.e. without the mediation of the fund. According to the Ministry of Finance, the special tax status of the trust fund should ensure that the source country of the income (if the source of income of the trust fund is outside Estonia) and the resident country of the non-resident investor review the trust fund and apply the taxation of investment income with the tax agreements concluded between them.

 

[TRGali]

See this: Cyprus - Corporate - Income determination

Thanks Jerry. I think I know understand what you mean and I realize I did not mention a relevant info, the derivatives I trade cannot be considered a "disposal of title" as per CY law and are therefore not tax exempt in CY under capital gain or whichever other way. Hence my need to use an intermediate structure like a fund, taxed at 0%, where I could extract as dividend.

This structure would not be deemed to be a fund, but a regular company. You are not pooling funds from investors, you are simply investing your money through an SPV.

Would that change my personal taxation in CY compared to if it was treated as a fund?

The other type of income, such as crypto trading, you could structure under Estonia (not taxed until not withdrawn). Estonia also allows you to avoid exit tax if you return the assets to Estonia within 12 months, so the profits from Estonia could be temporarily withdrawn and, e.g., moved to its Cyprus PE for tax-free trading.

Hi Don, yes I do fall under that other type of income...should have said earlier, did not anticipate the "overkill" line of answering. I don't think I would be interested in that solution of temporarily withdrawing though, but thank you.

Similar regulations are also in Estonia (tax transparent limited partnership fund), with slightly fewer limitations.
It normally consists of two entities:
1) Fund manager (e.g., private limited company). Pays Estonian corporate tax only on the distribution of profits.
2) The limited partnership trust fund. The fund is not a tax resident in Estonia but also not a non-tax resident - it's a hybrid structure.
Within the meaning of the Income Tax Act, the trust fund is not an income tax payer. The trust fund is exempt from income tax withholding obligations. If the trust fund earns a profit, then the distribution of dividends or the making of equity payments in excess of the contributions are not subject to taxation by the trust funds. Trust fund investors are taxed in the same way as when the same trust fund is made directly by the respective investment company, i.e. without the mediation of the fund. According to the Ministry of Finance, the special tax status of the trust fund should ensure that the source country of the income (if the source of income of the trust fund is outside Estonia) and the resident country of the non-resident investor review the trust fund and apply the taxation of investment income with the tax agreements concluded between them.

Thanks I like your creativity and knowledge as usual, seems another interesting variant solution of what I have in mind. I imagine the estonian fund is deemed tax transparant in Estonia? They have introduced anti hybrid rules in EU with ATAD II and I really wonder how Cyprus would treat such an entity. Do you or someone know ? In the context of me personally extracting dividend from such a tax transparent structure. It seems every country may see their own way these tax transparent structures, either opaque or not, and I don't really know about CY for this / nor do I get the full content of the anti hybrid rules.

 

[Don]

I imagine the estonian fund is deemed tax transparant in Estonia?

Yes, exactly. That's what I intended to convey.

They have introduced anti hybrid rules in EU with ATAD II and I really wonder how Cyprus would treat such an entity. Do you or someone know ? In the context of me personally extracting dividend from such a tax transparent structure. It seems every country may see their own way these tax transparent structures, either opaque or not, and I don't really know about CY for this / nor do I get the full content of the anti hybrid rules.

This can be more questionable if the investors are resident in other jurisdictions apart from Cyprus.

Individuals who are not domiciled in Cyprus for SDC purposes are exempt from SDC. Thus, dividend and (most types of) interest income for such individuals are exempt from all taxes in Cyprus.

So whether such an investor declares such income in Cyprus as interest or dividend income shouldnt matter.
More complicated way would be declaring the investment income following the see through principle and claiming relevant treaty benefits, but thats in my opinion unnecessary in Cyprus since the domestic rate is anyway lower (zero) in most cases. Obviously it matters where your fund invests to access treaty benefits since the fund cannot access Estonian treaties.
So declaring it as interest or dividend income in Cyprus is technically incorrect from Estonian point of view but creates no tax risk so "shouldn't matter".
Of course it can't hurt (a lawyer) if you spend a few thousand on a legal opinion to confirm this.