The Alternative Investment Funds Law (hereinafter, the AIF Law), defines alternative investment funds as any collective investment undertakings, including investment compartments thereof, which, collectively:

  • Raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and
  • Do not require authorisation pursuant to section 9 of the UCI Law, or pursuant to the legislation of another member state that harmonises the provisions of Article 5 of the Directive 2009/65/EC, as amended.

The AIF Law allows for three types of Alternative Investment Funds (AIFs) to be established in Cyprus:

  • Alterative Investment Funds with Limited Number of Persons (50) (AIFLNPs)
  • Alternative Investment Funds with Unlimited Number of Persons (AIFs)
  • Registered AIFs (RAIFs)




The main characteristics of Undertakings for Collective Investment in Transferable Securities (UCITS) and main objectives is the collective investment of funds of their investor/unit holders and can have the legal forms of a Common fund of a variable Capital Investment Company.

The UCI Law defines UCITs as undertakings the sole object of which is the collective investment in transferable securities and/or other liquid financial instruments of capital raised from the public, which operate on the principle of risk-spreading, and the units of which are, at the request of investors, redeemed or repurchased, directly or indirectly, out of the undertakings’ assets.


Taxation of Funds


  • Profits are liable to corporation tax irrespective of their legal status.
  • Interest income received by UCITs is considered active interest and as such taxed at the rate of 12.5% and exempt from SDC.
  • Profits on sale of securities and units in UCITs are exempt from taxation.
  • Deemed dividend distribution provisions are not applicable for non-Cyprus tax resident investors.
  • Actual dividends paid are subject to SDC at the rate of 17% in respect of Cyprus tax resident investors only.
  • Any profits derived by Cyprus Tax resident Management Companies are subject to 12.5% Corporation tax.

Special Contribution for Defence

Special Contribution for Defence is imposed on dividend income, “passive” interest income and rental income earned by companies’ tax resident in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled. It is charged at the following rates:


  Individuals (1)                % Legal entities (1)


Dividend Income from Cyprus tax resident companies 17(5) Nil (2)
Dividend Income from non-Cyprus tax resident companies           17 (5) Nil (3)


Interest income arising from the ordinary activities or

closely related to the ordinary activities of the business


Nil (4)


Nil (4)


Other “Passive” interest income 30 (5) 30 (5)
Gross Rental Income (reduced by 25%) 3 (5, 6) 3 (5, 6)




  • Legal entities are subject to Special contribution for Defence if they are tax resident of Cyprus. Individuals are subject to Special contribution for defence if they are both domiciled in Cyprus and have been tax residents of Cyprus for at least 17 out of the last 20 years prior to the tax year of assessment. Anti-avoidance rules apply.


  • Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are exempt, subject to certain anti-avoidance provisions.


  • The exception of this section does not apply if:
  • more than 50% of the paying company’s activities result directly or indirectly investment income and
  • the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6.25% on the profit distributed.

When the exemption does not apply, the dividend income is subject to Special Contribution for Defence at the rate of 17%.

  • Such interest income is subject to personal income tax/ corporation tax


  • The Special Contribution for Defence rate on Interest income of 30% is effective for interest received or credited. Interest income earned by individuals from Cyprus government savings bonds and development bonds as well as all interest earned by a provident fund is subject to special contribution for defence at the rate of 3% (instead of 30%). In the case where the total income of an individual (including interest) does not exceed €12,000 in a tax year, then the rate on interest income is reduced to 3% (instead of 30%).
  • Rental Income is also subject to personal income tax/corporation tax.

Foreign taxes paid can also be credited against the Special Contribution for Defence Liability.


Deemed dividend distribution

A Cyprus tax resident company is deemed to distribute as a dividend 70% of its accounting profit (after deducting corporation tax, special contribution for defence and capital gains tax), two years from the end of the tax year in which the profits were generated.

Such a deemed dividend distribution is reduced by the payments of actual dividends paid during the relevant period.

On the remaining net amount of the deemed distribution 17% Special Contribution for Defence is imposed on the shareholders who are both Cyprus Tax residents and Cyprus domiciled.

When an actual dividend is paid after the deemed dividend distribution date, then if Special Contribution for defence is due on such a dividend, the 17% is imposed only on the amount of the actual dividend paid which exceeds the dividend that was previously deemed to have been distributed and previously suffered Special Contribution for Defence.


Disposal of assets to shareholder at less than the market value

When a company disposes of an asset to an individual shareholder or a relative of his/her up to second degree or his/her spouse for a consideration less than the market value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend and will be subject to special contribution tax for defence. This provision does not apply for assets originally gifted to the company by an individual shareholder or a relative of his up to second degree or his/her spouse.


Company dissolution

The cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to special contribution for defence at the rate of 17%. This provision does not apply in the case of dissolution under a Reorganisation.


Reduction in capital

In the case of a reduction of capital of a company, any amounts paid or due to physical persons shareholders over and above the previously paid up equity will be considered as dividends distributed subject to special contribution for defence at the rate of 17%, after deducting any amounts which have been deemed as distributable profits.

The redemption of units or shares in a collective Investment Scheme is not subject to the above provisions.