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Tax on Collective Investment Schemes

Recent changes to Cyprus's Income Tax and Special Defence Contribution laws will benefit holders of units in Collective Investment Schemes, boosting Cyprus's attractiveness as a base for such schemes.

An amendment to the laws made in October 2009 makes it clear that redemptions of units in Collective Investment Schemes do not constitute a deemed distribution for the purposes of SDC, which is payable by Cyprus residents on interest, dividends and rent. As a result, redemptions of units do not trigger any tax liability as the Income Tax Law now expressly provides that they are treated as a disposal of securities, confirming the position set out in a circular issued by the Cyprus tax authorities in December 2008, which broadened the definition of securities and titles to include units in Collective Investment Schemes. As profits on disposals of securities and titles are exempt from tax in Cyprus this exempts gains on disposals of units from tax.

Furthermore, the Special Defence Contribution rate for deemed dividend distributions in respect of Collective Investment Schemes has been reduced from 15% to 3%. This reduction applies to both income and proceeds of liquidation. Unit holders that are not residents of Cyprus are exempt from the Contribution. Finally, the abolition of the 1% participation threshold for dividend tax exemption will extend the exemption to small portfolio holdings and so benefit Collective Investment Schemes.

The October 2009 changes are retrospective, and effective from January 1 2009.

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