October 2011 Newsletter

MIGRATION OF OFFSHORE FUNDS TO EUROPE: THE CYPRIOT   ICIS ALTERNATIVE

A recent survey by RBC Dexia Investor Services and KPMG has revealed that a significant number of hedge fund managers will continue the trend of creating EU-domiciled hedge funds to complement their Cayman Islands or other offshore offerings.  This suggests that alternative investment vehicles such as the ICIS (Cyprus), QIF (Ireland) and SIF (Luxembourg) are gaining popularity versus the UCITS framework (a UCITS, or Undertakings For The Collective Investment Of Transferable Securities, is a public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union).

The causes of this current movement can be described as twofold.  First, this trend is the result of investors becoming increasingly wary about allocating capital to offshore products.  Secondly, the EU’s Alternative Investment Fund Managers Directive (AIFMD) is also a major factor for managers considering re-domiciling in the future.

Although there is still a high level of uncertainty regarding the final nature of the AIFMD regulation, in particular the rules surrounding the use by hedge fund managers of the private placement regime to market their non-EU funds in the EU, it is due to be finalised later this year and enter into force on the 20th day following its publication in the Official Journal; member states will have two years to adopt its provisions into national law.

Highlights of the above mentioned survey, which polled 49 hedge fund managers with US$159 billion in assets under management, are as follows:

• Some 24% of hedge funds polled had already re-domiciled their funds while a further 27% said they would consider doing so at a later stage. The survey revealed that 58% of managers who had re-domiciled had used UCIT structures. A similar number had also used regulated, non-UCIT vehicles (some have used both products simultaneously).

• Of the 27% who considered re-domiciling, 77% said they would opt for a regulated, non-UCITS fund, such as the Cyprus International Collective Investment Scheme (ICIS), Irish Qualified Investment Fund (QIF) or Luxembourg Specialised Investment Fund (SIF).  ICIS, QIFs and SIFs share some of the characteristics and flexibility typically found in hedge funds and they generally cater to sophisticated investors. Just under half of the respondents favoured UCITS while a very small minority preferred an unregulated structure.

• Respondents were divided with some adopting a “wait and see” approach to the EU regulation, while others feel “the ongoing uncertainty was likely to encourage them to establish an EU fund before 2013 in order to ensure minimal disruption and uncertainty in regards to their business operations.” The survey also predicts there will be a wave of re-domiciliations during 2012 in anticipation of AIFMD.

• The market appears to be realising that although 90% of alternative strategies can be replicated under UCITS, specialised structures such as ICIS, SIFs and QIFs offer more flexible liquidity and transparency rules for hedge funds. While the UCITS regime can offer robust protection for investors, the wholesale shift into alternative UCITS which some had been predicting has not taken place.

• Approximately 52% of managers acknowledge EU restrictions on institutional investors allocating to offshore funds was the key driver for re-domiciling. For example, in some EU member states, insurers are faced with punitive capital charges or other restrictions on their investments in offshore funds when compared with investments made in EU regulated investment funds.

The popularity of the Caymans among investors could be further damaged by a recent decision by the Cayman Islands Court of Appeal to strike out two winding up petitions presented by an aggrieved investor against Camulos Capital, a hedge fund that suspended redemptions after the financial crisis.

This will increase the desire on the part of investors for funds to be set up in jurisdictions with European legal systems, company law and regulatory framework.  The trend is also being driven by investors’ desire to hold funds in more regulated jurisdictions, such as the case with French pension funds currently coming under strong political pressure not to invest in lightly regulated offshore products.

Although traditional offshore fund centres such as the Cayman Islands are still considered the best domicile choice for many hedge fund managers, co-domiciliation, with hedge funds offering both offshore and onshore options, is the most likely way forward. Market interest in alternative UCITS is growing but these structures are likely to evolve as complementary to offshore hedge funds in the longer term rather than replacing them.

As it is becoming more evident that EU fund domiciles are increasingly more relevant to the hedge fund community, the Cypriot ICIS should be considered by fund managers for its ability to offer a viable solution to the real need among clients for more liquidity and transparency. Co-domiciliation will also allow hedge fund managers to cater to investors that are not authorised to buy into Cayman or offshore funds with onshore products while retaining their existing offshore strategies.

Click here to learn more about Savva & Associates Fund Services and the Cypriot ICIS regime.


SIGNIFICANT TAX PLANNING OPPORTUNITIES FOR INVESTMENT INTO POLAND

As a result of recent Polish Corporate Income Tax amendments which came into force 1 January 2011, Corporate Income Tax (CIT) exemptions applicable to Polish closed-end investment funds have been extended to foreign funds, namely EU fund vehicles.

These recent amendments to Polish law have created new opportunities for tax planning making the use of a Cypriot Private International Collective Investment Scheme (PICIS) the most tax and cost efficient way to invest into Poland.

The following is a summary of various tax planning opportunities available to investors with projects in Poland, including real estate, mining and energy related, leasing, stock exchange investors, general trading companies and others.

A. Closed Investment Fund (CIF)

Closed Investments Funds, or CIFs (commonly referred to as a “FIZ” in Poland), are a popular method of carrying out business activities in real estate investment and other projects in Poland. Such Polish funds may also be used in carrying out any unregulated business activities, including leasing, trading activities, etc.  CIFs are very effective in terms of tax optimization, as the corporate tax rate is reduced to nil where the CIF carries out business activities through Polish joint-stock partnerships (JSP).

A CIF is a corporate body that may be established only by an Investment Management Company (commonly referred to as “TFI”) which acts as the management body of the CIF. The CIF issues investment certificates to investors for consideration of cash or assets in kind. Such investment certificates are considered securities under Polish law.

Most importantly, CIFs are entities fully exempt from CIT in Poland, however, their activities and transactions are subject to other taxes like VAT and transfer taxes.
    
A JSP on the other hand is considered transparent for CIT purposes (i.e. partners and shareholders are taxed on their share of the JSP’s profit). JSPs consist of at least two partners– an active partner and shareholder. The active partner is liable for all liabilities of the partnership whereas a shareholder is not liable for any of the partnership’s debts and has only limited influence on the JSP’s activities.

Description of the structure:

 
Under this structure, an investor sets up a limited liability company (LTD) with a minimum share capital of PLN 5,000. The LTD is required as an active partner of the JSP and will bear all potential liabilities and will manage the JSP on behalf of the Investor. Simultaneously, the TFI sets-up a CIF which will issue investment certificates to the investor.  The LTD, being the active partner, and the CIF, being passive shareholder, will then establish the JSP. The capital of JSP can be covered by the LTD (1%) and CIF (99%), for example.

Once the JSP is capitalised, it can commence business activities that may consist of purchasing/selling immovable property, carrying out real estate developing activities, mining projects, generating rental income, etc.

Taxation in Poland

As mentioned above, the JSP is a tax transparent entity. Therefore, income generated by the JSP is subject to corporate taxation at the level of the CIF and LTD. As the CIF is exempt from CIT, profits of the JSP allocated to the CIF are tax free (in the example above, 99% of income would be exempt from Polish CIT). The income allocated to the LTD is taxed at the standard corporate income tax rate of 19% (in the example above, only 1% of income is taxable).

The result it that distribution of profits to unit holders can be optimized so that there is no tax.

Polish Considerations

The CIF is subject to the following conditions in order to qualify for the CIT exemption:

• Requirement of asset differentiation i.e no more than 20% of funds to be invested in one project;
• Negotiations with TFI and Polish Financial Supervisory Authority (KNF);
• Agreement with TFI, depository bank, valuators, auditors;
• Cost / Benefit analysis;
• Transfer of assets to CIF.

Polish CIF and JSPs have recently become very popular vehicles used for investment in Poland. Such a structure allows for exemption of operational profits and capital gains from CIT.  However, the main disadvantages of this solution are the relatively high cost of implementation and maintenance of the structure, and also the obligation for asset differentiation.

As of 1 January 2011, amendments to Polish CIT Law came into force resulting in the above mentioned CIT exemptions being  extended to EU funds.

Therefore, the recent amendments to Polish tax laws open a wide range of opportunities for tax planning that involve foreign investment funds.  It is now possible to plan structures that will allow the following:

• Tax exemption of the operating profits of JSPs registered in Poland;
• Withholding tax exemption with respect to interest, dividends and royalties paid by Polish companies;
• Tax exemption of capital gains, including profits from the sale of bonds, stocks, shares and real estate.

Investment into Poland can now be made with no or little Polish tax exposure, with potential beneficiaries including real estate developers, companies involved in the energy sector, leasing companies, stock exchange investors, trading companies, and many other investors earning recurring taxable income in Poland.

Cyprus PICIS Structure:


 
Under this structure, a Private International Collective Investment Scheme (PICIS) is used to invest in a Polish JSP(s).  An ICIS is an investment fund that may be incorporated in the form of a limited liability company.  Once the ICIS forms a JSP together with a second partner (e.g. a subsidiary being a limited liability company), the foreign structure is in place.  Pursuant to Polish commercial law, partnerships have no legal personality and are not deemed to be taxpayers for CIT purposes. Hence, it is each of the partners who are liable to income tax on the partnerships’ profits, not the partnership itself. As a result, partnership profits assigned to the PICIS are exempt from CIT in Poland.

Taxation of Cyprus PICIS

Like all corporate entities with limited liability, it is exempt from profits from distributions received from the JSP on the basis that the JSP constitutes a Permanent Establishment (PE) in Poland. Moreover, the JPSs profits are exempt from Polish CIT as indicated above.

If the Cypriot ICIS meets specific requirements prescribed by Polish CIT law, it may be fully exempt from CIT in Poland. The requirements for an international ICIS to qualify for the Polish exemption are summarized as follows:

It should be noted that the Cyprus PICIS satisfies all of the above requirements regarding the Polish CIT exemption.

In summary, the profits allocated to an ICIS are fully exempt from Polish CIT as well as profits generated from the alienation of securities.

It is worth emphasizing that the maintenance costs of the investment fund in Cyprus are significantly lower than in Poland (i.e. CIF) and other foreign jurisdictions such as Luxembourg, Ireland and Malta.

Cyprus PICIS Considerations:

• The number of investors is set to a maximum of 100;
• The minimum investment of each investor is EUR 50,000;
• Should obtain specific rulings from the Polish Ministry of Finance;
• Must ensure compliance with Polish and Cypriot tax laws;
• Must ensure effective management and control in Cyprus;
• Must ensure proper substance in place at the Cyprus level.

We would like to highlight Savva & Associates’ experience and expertise regarding PICIS services, namely the following:

If you would like further information regarding structuring investment into Poland, please do not hesitate to contact Charles Savva at c.savva@savvacyprus.com


CYPRUS TAX ALERT: CHANGES AFFECTING INTERNATIONAL COMPANIES

On Friday 26 August, the Cyprus Parliament voted in favour of the first package of austerity measures in the form of tax amendments, with a second package of measures expected to be introduced to Parliament shortly.  The second package is widely expected to increase the  standard VAT rate to 17% (currently 15%, being the lowest in Europe).  The combined initiatives are expected to significantly improve Government finances and reduce the current budget deficit.

This article highlights the impact of tax changes on international companies operating in Cyprus.

Companies annual levy
All companies are now required to pay an annual fixed levy of €350 to the Registrar of Companies, with the exception of  dormant companies , those who do not own any assets, or companies that own property in a territory not controlled by the Republic. For groups of companies a limit of €20,000 is fixed.

The levy is payable by 31 December 2011 in relation to 2011 and by 30 June in respect of each subsequent year. Penalties will be imposed for late payment as follows:

• 10% penalty if the payment is made within two months of the due date;
• 30%penalty if paid up to five months from the due date;
• Failure to pay after five months may result in a deregistration (strike-off) of the company by the Cyprus Registrar of Companies.

If a company is re-instated within a two-year period from its strike-off, a fixed penalty of EUR 500, in addition to the outstanding amount of the levy, will be additionally imposed. The fixed penalty will be increased to EUR 750 where a company is re-instated after the two-year period.

Interest Income
The Special Defense Contribution on interest is increased from 10% to 15% with immediate effect, and is applicable to both individuals and companies.  Assuming most companies in Cyprus earn active as opposed to passive interest, they will not be affected by this amendment as active interest income is exempt from Special Defense Contribution.  

Dividend Income
The rate of Special Defense Contribution on dividends is increased from 15% to 17% with immediate effect and the rate increase will apply to all dividends arising, accruing or deemed to arise or accrue from the date the law was published in the official Cyprus gazette, irrespective of year to which the dividends relate.  This will mostly affect residents in Cyprus and groups of companies ultimately held by Cyprus tax resident individuals.

Tax incentives to attract highly-paid employees
Non-resident individuals earning in excess of €100,000, taking up residence in Cyprus will enjoy a 50% exemption to tax of their income for 5 years. This exemption is effective from 1 January 2012.

Personal Tax
A new personal income tax band has been introduced at a rate of 35% for income above EUR 60,000, effective from tax year 2011 (the top bracket was previously 30% for all income above EUR 36,300).

In an effort to attract high paid employees to work in Cyprus, commencing 1 January 2012, a 50% exemption will apply to the income of a non-resident person taking up residence in Cyprus to work for an employer in Cyprus. The exemption will apply for a five-year period starting from the first year of employment, provided the annual income of the employee exceeds EUR 100,000 per annum.

For further assistance please contact Charles Savvac.savva@savvacyprus.com