CYPRUS INVESTMENT FIRMS (CIFS) Your Passport for providing Financial Services in European Markets
How Eltoma Corporate Services can successfully assist you in establishing a Cyprus Investment Firm
How Eltoma Corporate Services can successfully assist you in establishing a Cyprus Investment Firm
Table of Contents I. II. III. IV. V.
Introduction. Do I Need to be Regulated? Regulated Investment Services. Share Capital Requirements. Additional Requirements for the Granting of the CIF License. VI. The Application Process. VII. Outcome of the Application. VIII. Legal Framework. IX. Tax Framework. X. Banking. XI. Conclusion.
Cyprus Investment Firms (CIFs) – Your Passport to Europe
I. Introduction Q Are you a Financial Services Provider seeking to enter European Markets? Q Are you in any way involved in managing discretionary accounts? Q Do you offer any of the following services, and wish to solicit clients residing in the European Union? Brokerage Services Forex Trading Investment Advise Portfolio Management If the answer is yes to any of the above questions then a Cyprus Investment Firm (CIF) should be considered. Cyprus is the ideal jurisdiction for providing Financial Services to customers residing in European Member States for two primary reasons:
A CIF offers a “Single Passport” to providing Investment Services across the European Union; by es tablishing a CIF you are able to solicit clients throughout Europe. A CIF offers favourable tax treatment due to the fact that Cyprus has one of the lowest corporate taxation regimes in the European Union and has particularly favourable tax provisions pertaining to financial services (for example there is no capital gains tax). Despite the Credit Crunch (or it could even be argued that as a result of this) financial services are still in high demand and they are an important contributor to the GDPs of all developed economies worldwide. The European Union, with approximately half a billion residents, can provide the perfect market for you to establish your client base. European Financial Service Providers have experienced exponential growth in assets under management in recent years, which are currently estimated at about one trillion Euros. Given the size and paramount importance of the European Market, all key Financial Service Providers should consider establishing their foothold within the EU.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 4
GDP Break Down per Sector (Source: European Commission Eurostat 2011)
EU-27
1.70%
19.50%
6.30%
19.40%
4.50%
5.70%
10.30%
10.00%
19.10%
3.50%
Euro Area
1.70%
19.30%
6.20%
19.20%
4.20%
5.30%
11.20%
10.00%
19.30%
3.60%
Belgium
0.70%
17.00%
5.70%
20.10%
4.10%
6.40%
9.00%
12.80%
22.20%
2.00%
Bulgaria
5.60%
24.70%
6.50%
19.80%
5.60%
8.00%
9.40%
5.50%
12.50%
2.40%
Czech Rep.
2.10%
31.10%
6.70%
18.80%
5.00%
5.10%
6.70%
6.80%
15.30%
2.40%
Denmark
1.40%
17.50%
4.80%
19.10%
4.50%
6.20%
11.20%
7.60%
24.10%
3.60%
Germany
0.90%
26.20%
4.60%
16.00%
3.80%
4.40%
11.40%
10.50%
17.80%
4.40%
Estonia
3.60%
23.90%
6.40%
21.80%
4.70%
3.50%
10.00%
8.60%
15.10%
2.40%
Ireland
1.70%
28.10%
3.20%
14.80%
2.60%
10.40%
7.80%
8.80%
20.10%
2.50%
Greece
3.10%
13.50%
4.50%
26.40%
5.10%
4.50%
13.80%
5.20%
18.60%
5.30%
Spain
2.50%
16.90%
10.10%
24.80%
4.30%
4.20%
7.80%
7.60%
18.10%
3.70%
France
1.80%
12.60%
6.20%
18.60%
4.80%
4.70%
13.20%
12.20%
22.50%
3.40%
Italy
2.00%
18.60%
6.00%
20.70%
4.30%
5.40%
13.80%
8.60%
17.00%
3.60%
Cyprus
2.40%
9.10%
8.00%
23.20%
4.10%
8.80%
11.80%
6.30%
22.20%
4.10%
Latvia
4.50%
19.30%
6.10%
31.60%
3.80%
3.80%
7.60%
7.10%
13.80%
2.40%
Lithuania
3.50%
24.50%
6.50%
31.70%
3.10%
2.60%
6.10%
5.90%
14.30%
1.80%
Hungary
5.40%
28.70%
3.90%
16.60%
5.40%
4.40%
8.40%
7.70%
16.60%
2.90%
Malta
1.80%
14.20%
3.90%
22.00%
5.00%
8.50%
6.20%
8.40%
19.70%
10.30%
Netherlands 1.70%
18.70%
5.50%
19.10%
4.80%
7.90%
6.40%
11.30%
22.10%
2.50%
Austria
1.70%
22.50%
6.80%
22.40%
3.00%
5.10%
9.60%
8.80%
17.30%
2.80%
Poland
3.60%
25.50%
7.90%
26.30%
3.60%
4.30%
5.40%
6.60%
13.80%
3.00%
Portugal
2.10%
17.00%
6.30%
24.80%
3.70%
6.50%
9.00%
6.70%
20.90%
3.00%
Romania
7.40%
29.90%
11.10%
21.50%
3.90%
2.30%
7.10%
4.40%
10.20%
2.20%
Slovenia
2.50%
24.60%
5.20%
21.10%
3.90%
5.40%
7.30%
9.20%
17.90%
2.90%
Slovakia
3.20%
32.60%
9.40%
18.10%
4.60%
3.50%
5.90%
6.10%
13.50%
3.10%
Finland
2.90%
20.90%
6.80%
17.30%
5.00%
2.80%
11.90%
8.00%
21.20%
3.20%
Sweden
1.70%
20.50%
5.80%
18.20%
5.40%
4.10%
9.00%
9.20%
23.10%
3.00%
U.K.
0.70%
16.50%
6.70%
19.00%
5.90%
9.40%
7.10%
12.30%
19.00%
3.40%
Iceland
7.70%
18.70%
4.40%
16.00%
3.80%
7.80%
10.70%
6.60%
21.30%
3.00%
Norway
1.50%
36.40%
5.90%
12.50%
3.60%
4.40%
7.20%
7.10%
19.50%
1.90%
Switzerland
0.80%
20.70%
5.40%
23.30%
4.00%
11.00%
0.80%
8.30%
17.00%
8.70%
Cyprus Investment Firms (CIFs) – Your Passport to Europe 5
From the above it is evident that financial services constitute an important part of every developed economy. Cyprus is an ideal domicile of choice, as it combines competitive costs relative to other EU jurisdictions and a favourable tax regime which extends to forty five countries through double-tax treaties. The following key benefits should be highlighted:
No capital gains tax on profits from the sale of financial instruments. Dividend income exempted from Tax. No tax on deemed dividends distribution for non-tax resident investors. As a financial services professional, the first question that should be asked is whether regulation is required. Financial Services in Cyprus are regulated by the Cyprus Securities and Exchange Commission (CySEC). CySEC’s responsibility is to protect the investment public, and in particular retail (as opposed to accredited) investors, and to promote and enhance the public’s trust in financial markets. The commission outlines its key responsibilities pertaining to overseeing investment firms as follows (please note that the below does not constitute a comprehensive list):
To supervise and control Licensed Investment Services Companies. To grant operating licenses to investment firms, including investment consultants, brokerage firms and brokers. To recall these operating licenses for special reasons. To impose administrative sanctions and disciplinary penalties to brokers, brokerage firms, investment consultants. The first step therefore is to understand whether regulation is mandatory; Eltoma Corporate Services can assist you in conducting a preliminary regulatory review in order to establish whether you should be regulated by CySEC. It should also be noted that CySEC has in place cooperation agreements with a number of regulators of other sovereign states (including the Russian Federation); these agreements further contribute in making Cyprus the undisputed domicile of choice.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 6
The following table lists the bilateral agreements in place between CySEC and other regulatory entities. Number
Regulatory Authority
1
Hellenic Republic Capital Markets Commission.
2
Australian Securities & Investments Commission.
3
Austrian Securities Authority.
4
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN) Germany.
5
Bulgarian Financial Supervision Commission.
6
Comissão do Mercado de Valores Mobiliários-Portugal.
7
Czech Securities Commission.
8
Egypt Capital Markets Authority.
9
Hungarian Financial Supervisory Authority.
10
Isle of Man Financial Supervision Commission.
11
Israel Securities Authority.
12
Jersey Financial Services Commission.
13
Malta Stock Exchange.
14
Polish Securities and Exchange Commission.
15
Romanian National Securities Commission.
16
Slovak Republic Financial Market Authority.
17
Dubai Financial Services Authority.
18
Federal Financial Markets Service of Russia.
19
China Securities Regulatory Commission.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 7
II. Do I need to be regulated? The following is a brief assessment aimed at determining whether you are required to obtain CIF authorisation. Number
Question
Answer is YES
Answer is NO
1
Do you have a company established or do you intend to establish a company in Cyprus?
Go to Question 2
No Regulation Needed.
2
Do you intend to provide / perform any investment services / activities either within or outside Cyprus on a professional Basis?
Go to Question 3
No Regulation Needed.
3
Are the investment services / activities you intend to provide / perform related to one or more financial instruments (refer to Annex 1)
Go to Question 4
No Regulation Needed.
4
Do you fall within any of the exemptions (refer to Annex 2) in relation to the relevant investment services / activities?
No Regulation Needed.
An Authorisation as a Cyprus Investment Firm (CIF) is Required.
Once it has been established that regulation is required, application for CIF Authorisation should commence as quickly as possible, as the application process is complex and time consuming, however Eltoma Corporate Services will assist every step of the way. It should be highlighted that a CIF may provide investment services on a professional basis only if it has received prior authorisation from the commission. Maintaining a regulated entity could also prove demanding, as your compliance requirements and costs will inevitably increase, in exchange for the increased compliance burdens however, you will be allowed to market your products and services across European Markets and to a variety of investors (both accredited and retail). The main overriding advantage however of a CIF authorisation is that it is valid in all member states, and allows the CIF to provide the services for which it has been authorised in all the member states.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 8
III. Regulated Investment Services The commission is responsible for overseeing and regulating the following services (shown in the table below). The first task is therefore to decide which services a license should be applied for. Number Investment Service
Description
1
Reception and transmission of orders in relation to one or more financial instruments.
Reception and transmission of client orders, without the need to obtain information regarding the knowledge and experience of the client in order to assess the appropriateness of the service or the instrument for the client.
2
Execution of orders on behalf of clients.
Acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients.
3
Dealing on own account.
Trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments. The terms “trade on own account” or “trading on own account” have a similar interpretation.
4
Portfolio management.
Managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments.
5
Investment advice.
The provision of personal recommendation to a client, either after his request, or on the initiative of the CIF, in relation to one or more transactions related to financial instruments. For the purpose of this definition, a personal recommendation is one recommended that (a) is made to a person in his capacity as a client or potential client, or in his capacity as an agent of a client or a potential client, and (b) is presented as suitable for the client, or is based on a consideration of the circumstances of the client and advises the client to take one of the following steps: (i) to buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument. (ii) to exercise or not exercise any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem financial instrument. But does include a recommendation that is issued exclusively through distribution channels or to the public.
6
Underwriting of financial instruments and / or placing of financial instruments on a firm commitment basis.
7
Placing of financial instruments without a firm commitment basis.
Underwriting refers to the process whereby an investment bank raises investment capital from investors on behalf of corporations and / or governments that are issuing securities (either Equity or Fixed Income). It assumes that the underwriter has taken on the risk of distributing the securities. Should he be unable to find enough investors, he will have to hold some securities for himself.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 9
Number Investment Service
Description
8
A multilateral system operated by a CIF or market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interest in financial instruments – in the system and in accordance with its non-discretionary rules.
Operation of Multilateral Trading Facility.
CIF’s can also provide the below regulated non-core (ancillary) services, however it should be emphasised that ancillary services may only be provided together with an investment service and / or activity (as per the table above). A license for providing only ancillary services cannot be granted.
Number
Ancillary Service
1
Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash / collateral management.
2
Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction.
3
Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings.
4
Foreign exchange services where these are connected to the provision of investment services.
5
Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments.
6
Services related to underwriting.
7
Investment services and activities as well as ancillary services related to the underlying derivatives, included under sections 5, 6, 7 and 10 in Annex 1, where these are connected to the provision of investment or ancillary services.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 10
IV. Share Capital Requirement The exchange commission stipulates the minimum issued and paid up share capital that an investment firm should commit to before commencing operations. The required capital depends on the services that the investment firm in question intends to provide. Therefore, based on the decision as to what services will be applying for authorisation, it can be assessed how much share capital is required. The minimum share capital requirement is intended as a tool for assessing whether the CIF has enough own capital to meet obligations. The following table summarises the minimum share capital that is needed based on the different investment services: No.
Investment Service
Holds Clients’ money Does Not hold Clients’ and / or clients’ money and / or financial instruments. Clients’ financial instruments, and which for that reason may not at any time place themselves in debt with their Clients
Provides one or more of the following investment services and / or performs the following investments activities
1
Reception and 200,000 EUR transmission of orders in relation to financail instruments.
80,000 EUR
N/A
2
Execution of orders on behalf of clients.
200,000 EUR
N/A
N/A
3
Portfolio Managemnet.
200,000 EUR
N/A
N/A
4
Provision of investment advise.
200,000 EUR
80,000 EUR or 40,000 EUR and Professional Indemnity Insurance.
N/A
5
Dealing on own account.
N/A
N/A
1,000,000 EUR
6
Underwitting of N/A financial instruments and / or placing financail instruments on a firm commitment basis.
N/A
1,000,000 EUR
7
Placing of financail instruments without a firm commitment basis.
N/A
N/A
1,000,000 EUR
8
Operating of Multilateral Trading Facility (MTF).
N/A
N/A
1,000,000 EUR
Cyprus Investment Firms (CIFs) – Your Passport to Europe 11
It should also be emphasised that the minimum share capital requirement does not lapse after the authorisation is granted. The investments firm’s total accounting equity (retained earnings + shareholders’ capital) can not fall under the initial share capital requirement. For example, if initial share capital requirement was 200,000 EUR, the total equity cannot fall below 200,000 EUR. If this does occur the exchange commission will request an injection of additional funds into the company in order to bring total equity above the minimum threshold.
V. Additional requirements for the granting of a CIF License Apart from the share capital requirement, a CIF’s head office must be situated on the island and be fully and appropriately staffed. Investment firms’ employees must be of good repute and have the necessary skills, knowledge and expertise for performing their assigned responsibilities. The board of directors of a CIF are required to be comprised of at least two executive and two independent non-executive members. All of the appointed board members must possess the appropriate professional knowledge and industry experience. It should be emphasized that the two non-executive members are intended to participate on board meetings as independent consultants, in order to be able to provide unbiased advice to executive members and therefore enhance the “four eyes” principle. They are therefore prohibited from being associated with the firm’s operations in any material way. For example, someone who is employed by one of the firm’s suppliers will be prohibited to act as a non-executive director, for his independence would be compromised.
VI. The application process When it has been decided to proceed, Eltoma Corporate services will discuss in detail the application process. The following table summarises the key documents that are required (please note that the table below is intended as an example and does not constitude a comprehensive list of all documents needed – the table in annex 3 provides a full check list of documents needed for the application) Document / Task
Description
Organisational Chart
An Organizational Chart of the company stipulating the Board of Directors, general management and key employees. At a minimum the CIF should have two executive and two non-executive directors, a compliance officer, a risk manager, an IT officer. However at the commencement stage, depending on the volume of operations, some of the key functions can be conducted by the company’s directors.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 12
Document / Task
Description
Group Structure
A Group Structure Chart of the company needs to be prepared and submitted (if applicable). This is necessary if the CIF is part of a group of companies.
Business Plan
A detailed Business Plan of the company should be prepared and submitted. The business plan should include a detailed explanation of the company’s Investment Strategy, description of operations, and projected (budgeted) financial accounts for a three year horizon (at a minimum). The budgeted financials should include a full set of accounts prepared under IFRS (Profit & Loss, Balance Sheet and Cash Flow Statement). It is also worth mentioning that projected financials should be presented under three alternative scenarios (average, pessimistic, optimistic) and if possible the applicant should assign probabilities to each scenario.
Outsourced Services and Counterparties
A detailed description of services that will be outsourced (performed outside of Cyprus or outside the firm) should be specified. For example internal audit or IT Support could be outsourced (depending on the volume of operations). Detailed information about all the key counterparties that the company will be working with (i.e. your service providers, example prime brokers, liquidity providers and custodians, internal and external auditors) should be submitted – copies of engagement agreements).
Anti-money laundering manual
Know your Clients (KYC) Manual and Anti-Money Laundering Procedures Manual should be prepared and submitted.
Internal controls procedures manual
Internal controls manual should be prepared and submitted.
Executive Directors’ C.V.s
The Relevant Industry Experience of the Board of Directors will need to be demonstrated. It is advisable to submit C.V.s of the board members with the application. Eltoma Corporate Services can assist you in drafting C.V.s that highlight the relevant experience required by CySEC.
Non-Criminal Record Certificates and Non-bankruptcy Certificates.
Non-Criminal and Non-bankruptcy certificates for all the board members and shareholders should be submitted to CySEC. These documents should be submitted in English.
Consent to act as Director (primarily applicable to Non-Executive Directors)
If any candidate board member is sitting on the board of directors of another CIF, a letter of consent from the CIF in question must be provided before the candidate can be appointed as a board member (this provision primarily applies to non-executive directors).
Office lease agreement
A permanent establishment in Cyprus is compulsory (permanent physical office). This can be established at a later stage, however a permanent establishment will be required before the company is allowed to solicit clients. Therefore it is advisable to outline your plans for setting up an office in the application.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 13
The following table summarises the application process. Number Description 1
Preliminary discussion undertaken in order for Eltoma Corporate Services to understand the nature of the business. Upon completion the quotation will be forwarded for the application. Standard application fees for professional services are approximately 25,000 EUR + V.A.T. (if applicable). Please Note that the above fees do not include company incorporation costs (for incorporating the Cyprus Company to be licensed), any government fees associated with the application, or any costs associated with legalisations of documents that may arise. Please also note that two of the Directors (non-executive) should be Cyprus residents, with experience from the Financial Sector. Therefore you should consider that there will be directorship fees involved (usually in the region of 20,000 EUR per annum).
2
Upon acceptance of the quotation Eltoma Corporate Services will forward a Letter of Engagement. Please note that payment terms are as follows:
30% of the fees payable upon commencement of the engagement. 30% of the fees payable upon filing the application with the exchange commission. 40% of the fees are payable when the exchange commission grants the authorisation 3
Eltoma Corporate Services will forward a questionnaire for the development of the business plan.
4
Eltoma Corporate Services will incorporate the Cyprus Company to be licensed (please allow two weeks for this process to be completed).
5
Eltoma Corporate Services will forward a portfolio of Cypriot non-executive directors for selection; two are required as it is obligatory for a CIF to have two non-executive directors.
6
Upon selection of two non-executive directors (it is advisable to meet them in person) Eltoma Corporate Services will initiate the process of appointment.
7
Eltoma Corporate Services will commence work and gather the documents needed. Due to the volume of documents that need to be collected / prepared, it may take a minimum of three months until completion.
8
Once the application process has been completed a joint review will take place.
9
Once the joint review has been completed the application is filed with the exchange commission.
10
The exchange commission will reply with a questionnaire requesting clarifications / points that required explanation based on the application (usually this takes place approximately two months after initial filing)
11
Eltoma Corporate Services will reply to CySEC’s questions.
12
The Commission will request that the required share capital is locked in the company’s bank account and provide supporting documents verifying this from the bank (this usually takes place two weeks before granting the license).
Cyprus Investment Firms (CIFs) – Your Passport to Europe 14
Number Description 13
The Exchange Commission grants a provisional authorisation to act as a Cyprus Investment Firm. The license is provisional on completing the terms specified in the application. For example hiring the appropriate personnel as per the organisational chart that was submitted. From the date that the provisional license is granted, there is a period of twelve months to comply with all requirements, reply to CySEC, and start offering the investment services for which the license has been granted. If you fail to provide the investment services in question within twelve months, the license will be automatically revoked.
14.
Once key personnel have been recruited and all replies have been submitted to CySEC, operations can commence and clients can be solicited.
VII. Outcome of the Application In assesing the application, the exchange commission will base its decision on a number of parameters, which are summarised as follows:
Company has adequate initial capital. Company has suitable shareholders who are able to finance and support the business. Whether suitable persons will effectively direct the business. Company’s key employees are suitable. Head office has been established in Cyprus. Company is a member of investors’ compensation fund. Company has adequate organisational procedures in place. The following table elaborates on key points that the commission is evaluating in making their decision for granting the license. Number Description 1.
The Board of Directors must demonstrate that it has sufficient expertise so as to exercise constructive influence over management and business strategy and must be deemed fit to ensure the sound and prudent running of the company. Their reliability, experience, and professional skill and diligence will be evaluated.
2.
The Board should be comprised, at a minimum, of two experienced executives who are capable of fulfilling their duties. They should both be accessible and available to appear before the Commission with reasonable notice.
3.
The company should be able to demonstrate that it has installed the appropriate controls and safeguarding arrangements for protecting electronic data processing and has adequate structures and mechanisms in place in order to guarantee the protection of investors’ assets and eliminate any conflict of interest that may arise between the company, its employees and clients’ interests.
4.
The company should be able to demonstrate that it has successfully established a physical presence in Cyprus. This entails establishing and subsequently operating a full-fledged office with the appropriate telecommunications network, hardware and software needed, staffed with employees on a full time basis as described in the applicant’s organizational chart.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 15
VIII. Legal framework. Cyprus investment firm law is a direct adaptation of the European commission’s Markets in Financial Instruments Directive (MiFID), which is the core pillar underlying EU financial markets integration. The Directive facilitates harmonized regulation for investment services across thirty European nations. Its main objective is to increase competition and consumer protection in investment services; and is considered the most significant piece of legislation pertaining to financial services hitherto introduced in Europe. The following discussion intends to underline some of the highlights of the EU Directive. The MiFID classifies clients into retail, professional (accredited) and eligible counterparties. This facilitates the tailoring of regulatory requirements according to the knowledge and experience of clients. Therefore different levels of regulatory protection pertain to each category. The client categories, emphasizing the level of legal and regulatory protections, are summarized in the following table: Category
Protection
Description
1. Retail
High
Retail clients are afforded the most regulatory protection.
2. Professional Medium
Professional clients are considered to be more experienced, knowledgeable and sophisticated and are able to assess their own risk and are thus afforded fewer regulatory protections. A client can be classified as professional if he or she meets the following three criteria: 1. The client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters. 2. The size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments exceeds € 500,000. 3. The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged. It is worth mentioning that the above criteria are in line of the industry’s definition of an accredited investor (standard Industry convention). An Accredited investor pertains to an individual that has a Net Worth of at least one million US$, not including the value of one’s primary residence, or has income of at least $200,000 each year for the last two years (or $300,000 together with his or her spouse if married) and has the expectation to make the same amount this year.
3. Eligible Low Counterparties
Eligible Counterparties are investment firms, credit institutions, insurance companies, UCITS and their management companies, other regulated financial institutions and in certain cases, other undertakings. MiFID provides a ‘light-touch’ regulatory regime when investment firms bring about or enter into transactions with the Cyprus Investment firm (it should be noted that this category does not include pension funds and other employee benefit plans, which enjoy a high degree of regulatory protection).
Cyprus Investment Firms (CIFs) – Your Passport to Europe 16
In addition to the categories in the above table, the EU directive also distinguishes between discretionary and non-discretionary clients (or discretionary verses non-discretionary investment services). When an investment firm executes transactions for non-discretionary clients, the directive stipulates that the firm should seek “best execution” as opposed to selecting the option that has the lowest transaction costs. More explicitly, in order to ensure a high quality of execution of investors’ transactions and to uphold the integrity and overall efficiency of the financial system, the EU Directive imposes an effective “best execution” obligation to ensure that investment firms execute clients’ orders on terms that are most favorable to the clients. This obligation applies to firms which owe contractual or agency obligations to their clients. In assessing best execution the investment manager should consider a number of criteria, such as the availability of pre- and post-trade transparency data, as well as transaction costs. Nevertheless, other information such as the number of orders cancelled prior to execution or the speed of execution can also be relevant.
IX. Tax Framework. In this section we provide a brief description of the tax environment applicable in Cyprus, with particular emphasis (highlights) on provisions that are of interest to financail services providers. This section is not indended to be a comprehensive review of Cyprus Tax Provisions. Taxation in Cyprus is administered under a number of directives, depending on how income is derived. The idea behind this is that a specific income is taxed only once, under the directive that it is classified under. The Different Tax Categories (directives) are summarised in the following table:
Number
Directive
1
Income Tax (both Corporate and personal Income Tax fall under this directive).
2
Special Defence Contribution Tax (S.D.C.).
3
Capital Gains Tax.
4
Immovable Property Ownership Tax.
5
Inheritance Tax.
6
Stamp Duty Tax.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 17
In Addition to the above direct taxes on income, there is also an indirect Tax on consumption, V.A.T. (Value Added Tax). It is important to realise that the above taxes are government taxes. Local authorities (municipalities) also have the right to impose taxes on residence. An example of a municipal tax will be sewage tax or garbage tax. The important thing about municipal taxes is that for companies they are tax-deductible for calculating the company’s income tax burden. In order for a company to be taxed in Cyprus, under corporate income tax, it must be a tax resident of the Republic. To establish this, the company should successfully demonstrate that Management and Control is Exercised in the Republic. Under Cyprus Company’s law, however, there is no clear cut definition as to how this is achieved. The general guidelines are the following: Number
Guideline
1
The Majority of the Members of the Board of Directors Reside in Cyprus.
2
The Place where the Majority of the Board Meetings take Place and Subsequent Significant Decisions are taken is Cyprus.
Once a company is established as a tax resident of the Republic, its worldwide Income is taxed in Cyprus. The following table summarises a few highlights that are of particular interest to investment firms. Number
Highlight
1
Losses / Gains from Accounting Foreign Exchange Differences (either realised or unrealised) are excluded (are exempt) from Corporate Income Tax computations.
2
Income derived from the Trading of Securities is exempt from Income Tax because it is taxed under the capital gains directive (at 0%). All Financial Products, example Shares in ETFs (Exchange Traded Funds), Commodities, Futures and Forward Contracts, Foreign Exchange Trading (FX Trading), options contacts and other derivatives, are considered securities. Profits from Short Selling of Securities are also exempt from Income tax. Important, even if a company’s main activity is trading of securities, it is still possible to avoid income tax on these activities.
3
The Corporate Income Tax in Cyprus is 10%. (One of the lowest in EU) (Please Note that Corporate Income Tax is likely to increase to 12.5% in the near future).
4
All Expenses associated with generating revenue are deductible from Taxable Income Calculations.
5
Profits from the Sale of Russian Partnership Companies, (“OOO” companies) that don’t issue shares can be exempt from Income tax.
6
Dividends Received and Interest Income are exempted from Income Tax (and are taxed under S.D.C. Tax).
Cyprus Investment Firms (CIFs) – Your Passport to Europe 18
There are also some notable exemptions, i.e. financial instruments that are not considered as securities under Cyprus Tax guidelines, and therefor do not fall under the Capital Gains Tax directive (0% Tax Rate). They are effectively classified under Special Defence Contribution Tax (S.D.C.) Directive and any interest income derived from them is taxed under S.D.C. They are as follows: Number
Name
Treatment
1
Promissory Notes
Promissory Notes are not considered securities (they are classified and treaded as loans for tax purposes).
2
Re-Purchase agreements
Re-Purchase agreements are not considered securities (they are classified and treaded as loans for tax purposes).
3.
Bonds
Bonds are considered as loans for tax purposes and are therefore not classified as securities. Capital gains from the trading of Bonds (profits) have to be separated; part is treaded as interest income on a loan and taxed under S.DC. Tax and part is traded as capital gains profits and taxed under Capital Gains Tax.
Cyprus also provides favourable tax provisions pertaining to V.A.T. for financial services, that is to say, if you are offering financial services through a CIF most likely you will not have to charge your clients V.A.T. In determining whether a Service is taxable under V.A.T. provisions, there are two important rules: Number
Rule
1.
The nature of the service (whether the Service is Exempt or Taxable, as certain financial services are exempt from V.A.T. – please refer to the following table).
2.
To whom the service is provided? Even if a specific service is subject to V.A.T. the entity consuming the service and the place of consumption of the service can determine whether Cyprus V.A.T. should be levied. To state this differently. Whether Cyprus V.A.T. should be charged and accounted for on taxable financial services depends on the status and the establishment of the recipient.
It is also noted that ancillary Services may only be provided together with an investment service (as per relevant provisions regulating investment firms in Cyprus). Whether an ancillary service is subject to V.A.T. depends as to whether the service is offered as a standalone, or as ancillary to an Investment service.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 19
The following table covers V.A.T. applicability for Investment Services (as described by CySEC)
No Investment Services
As Standalone Service
Where one of the Service is the main Supply and the other auxiliary / Notes
1
Reception and Taxable. Transmission of Orders in Relation to one or more financial instruments.
1. is Exempt if Provided in conjunction with 2, i.e. if the main service is the execution of orders.
2
Execution of Orders on Behalf of Clients.
Exempt unless in relation to the physical possession or disposal of commodities.
CySEC and the V.A.T. Commissioner do not provide adequate guidance on this point. 99% of Financial Instruments that deal with commodities (Futures for example) are usually settled in cash, and do not end in delivery of the underlying commodity being traded. Therefore I would argue that this service is practically Exempt.
3
Dealing on own Account.
Exempt unless in Relation to Commodities.
As Stated above (point 3) most Financial Contracts do not end in delivery of the underlying commodity being traded, therefore I would argue that this service is exempt.
4
Portfolio Management.
Taxable.
Exempt where provided as an auxiliary supply of the execution of orders.
Notes
This Service pertains to brokerage commissions. In reality (99% of cases) brokers do not charge a commission per see but generate revenues from the Bid-Ask Spread (this is the widely used industry practise). Therefore it is impossible and unreasonable to impose V.A.T. on this service. This implies that the Revenues of Forex Companies (which are essentially Foreign Exchange Brokers) are exempt from V.A.T. Taxation.
This is exempt if the manager only provides some investment advice / guidance before executing orders (acting as a broker). However when full discretion is exercised over clients’ funds this is taxable. However it falls under the normal provisions of V.A.T. Services. If for example a Cyprus Company is providing portfolio management services to clients outside of the EU, then it is exempt from charging Cyprus V.A.T.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 20
.
5
Investment Advice.
Taxable.
Exempt where provided as an auxiliary supply of the execution of orders.
As point 4 above, if the main service being provided is brokerage, and the manager only provides some guidance before executing clients’ orders, this is exempt. It also falls under the general provisions of V.A.T. so if a Cyprus Company provides Investment Advice to a client outside of the European Union, it does not have to charge Cyprus V.A.T.
6
Underwriting of financial instruments and / or placing of financial instruments on a firm commitment basis.
Exempt.
n/a
Investment Banks issuing (underwriting) securities are exempt from V.A.T. Provisions.
7
Placing of Taxable. financial instruments without a firm commitment basis (advice for placement)
n/a
This pertains to Investment Banking advisory services; however there is very little guidance from CySEC or the V.A.T. Commissioner as to the actual provisions of how this service should be taxed.
8
Operating of Multilateral Trading Facilities (Exchange Platform).
n/a
This refers to companies managing an Exchange, or a comprehensive multi trading platform (electronic exchange market). Thus far nobody provides this service in Cyprus (no CIF has applied for this service yet) and there is little guidance form CySEC on this service.
Exempt.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 21
The following table covers V.A.T. applicability for ancillary services (as described by CySEC). Number
Ancillary Service
Issues to Consider
1
Safekeeping and administration of financial instruments, including custodianship and related services.
Follows the treatment of the main supply but if e.g. safekeeping is charged separately and does not have the meaning of global custody services, then it’s taxable.
2
Granting credits or loans to one or Exempt. more financial instruments, where the firm granting the credit or loan is involved in the transaction.
3
Advise to undertakings on capital structure, industrial strategy and related matters and advice and service relating to mergers and the purchases of undertakings.
Follows the treatment of the main supply but if on isolation is taxable.
4
Foreign exchange services where these are connected to the provision of investment services.
Follows the treatment of the main supply.
5
Investment research and financial analysis of other forms.
Follows the treatment of the main supply but if on isolation is taxable.
6
Services related to underwritings.
Follows the treatment of the main supply, e.g. underwriting.
It is worth noting that calculating V.A.T. on financial services could be challenging. For example portfolio management services to clients in Cyprus are taxable; however the standard industry convention is that an incentive fee is charged on annual portfolio returns. The company must calculate its V.A.T. liability on a quarterly basis however. The standard convention under V.A.T. directives (for uncertain cases) is that a liability to V.A.T. arises the earliest of issuing a sales invoice, or cash collection form the client. In the case of portfolio management, the company providing the service is obligated to build in its annual incentive fees the applicable V.A.T. rates, and calculate and declare V.A.T. accordingly on a quarterly basis (a task that could be challenging). Given the complexity of financial services, it is advisable that all CIFs write a letter to the commissioner of V.A.T. describing in detail the nature of their operations and the services
Cyprus Investment Firms (CIFs) – Your Passport to Europe
X. Banking A CIF is not required to maintain a bank accountant in Cyprus. Eltoma Corporate Services can assist you in opening a Bank Account in a number of jurisdictions around the globe; please see list below: Juristiction Bank AUSTRIA
Liechtenstein Landesbank
AUSTRIA
Raiffeisen Bank
BELIZE
Choice Bank Ltd.
BVI
Scotiabank
CAYMAN ISLANDS
Bank of Butter Field
CAYMAN ISLANDS
Royal Bank of Canada
CZECH REPUBLIC
PPF Banka
DUBAI
Barclays
DUBAI
Dubai Bank
DUBAI
Mashreq Bank
DUBAI
National Bank
DUBAI
Standard Chartered
DENMARK
Nordea Bank
GERMANY
Commerzbank
HONG KONG
ANZ BANK
HONG KONG
Bank of East Asia
HONG KONG
Citibank Hong Kong
HONG KONG
DBS
HONG KONG
HSBC
HONG KONG
Standard Chartered Bank
LATVIA
ABLV BANK
LATVIA
AS EXPOBANK
LATVIA
Baltikums Bank
LATVIA
Latvijas Pasta Banka
LATVIA
RIETUMU BANK
LATVIA
Norvik Bank
LATVIA
Rigensis bank
LIECHTEINSTEIN
Valartis Bank
SINGAPORE
ANZ Bank of Singapore
SINGAPORE
Bank of Singapore
SINGAPORE
CIMB Bank
SINGAPORE
DNB Bank
SINGAPORE
DBS Bank
SINGAPORE
OCBC
SINGAPORE
Standard Chartered Bank
ST VINCENT AND THE GRENADINES
The Loyal Bank
ST VINCENT AND THE GRENADINES
Euro Pacific Bank
SWITZERLAND
C.I.M Banque
Cyprus Investment Firms (CIFs) – Your Passport to Europe
XI. Conclusion Eltoma Corporate Services work in conjunction with KPMG Cyprus; KPMG Cyprus acts as the promoter in the application process. Therefore by choosing Eltoma Corporate Services the advantages of flexibility, efficiency and cost effectiveness are combined with having the peace of mind that comes with working with KPMG, one of the largest professional services companies in the world.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 24
Disclaimer This leaflet has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his / her own case. No responsibility can be accepted by the authors for any loss occasioned by acting or refraining from acting on the basis of this leaflet.
INFO www.eltoma-cyprus.com / www.eltoma-offshore.com Office 403, 10 Georgiou Gennadiou Street, 3041 Old Town, Limassol, Cyprus Tel: 0357 25 345 010 / Fax: +357 25 818 852
Cyprus Investment Firms (CIFs) – Your Passport to Europe 25
Annex 1 – Financial Instruments 1. Transferable securities. 2. Money-market instruments. 3. Units in collective investment undertakings. 4. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securi ties, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash. 5. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event). 6. Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market or/and an MTF. 7. Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in point 6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls. 8. Derivative instruments for the transfer of credit risk. 9. Financial contracts for differences. 10. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contract relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Part, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognized clearing houses or are subject to regular margin calls.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 26
Annex 2 - Exemptions 1. Members of the European System of Central Banks and other national bodies performing similar functions and other public bodies charged with or intervening in the management of the public debt. 2. Insurance undertakings. 3. Undertakings for collective investment in transferable securities within the meaning of section 2 of the Open-ended Undertakings for Collective Investments in Transferable Securities (UCITS) and Related Issues Law, global collective investment schemes within the meaning of Article 2 of the Global Collective Investment Schemes Law, and the funds for occupational retirement provision within the meaning of section 2 of the Establishment, Activities and Supervision of the Funds for Occupational Retirement Provision, including the depositaries and managers of all the above. 4. Persons which provide investment services exclusively for their parent undertakings, for their subsidiaries or for other subsidiaries of their parent undertakings. 5. Persons which provide investment services consisting exclusively in the administration of employee participation schemes. 6. Persons which provide investment services which only involve both administration of employee -participation schemes and the provision of investment services exclusively for their parent undertakings, for their subsidiaries or for other subsidiaries of their parent undertakings. 7. Persons providing an investment service where that service is provided in an incidental manner in the course of a professional activity and that activity is regulated by legal or regulatory provisions or a code of ethics governing the profession which do not exclude the provision of that service. 8. Persons who do not provide any investment services or activities other than dealing on own account unless they are market makers or deal on own account unless they are market makers or deal on own account outside a regulated market or an MTF on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them. 9. Persons dealing on own account in financial instruments, or providing investment services in commodity derivatives or derivative contracts included in the paragraph 10 of Part III of the Third Appendix, to the clients of their main business, provided this is an ancillary activity to their main business, when considered on a group basis, and that main business is not the provision of investment services within the meaning of the present law or banking services under the banking legislation. 10. Persons providing investment advice in the course of providing another professional activity not governed by this Law, provided that the provision of such advice is not specifically remunerated. 11. Persons whose main business consists of dealing on own account in commodities and/or commodity derivatives; the present exception shall not apply where the persons that deal on own account in commodities and/or commodity derivatives are part of a group the main business of which is the provision of other investment services within of this Law or banking services under the banking legislation.
Cyprus Investment Firms (CIFs) – Your Passport to Europe 27
Annex 3 – Check List of documents to be submitted with the actual CIF Application. Appendix
Details/documents
Subparagraph on the Form
1
Certificate of Registration/Incorporation
1.3
2
Certificate of the Registered Office of the applicant
1.4
3
Certification of the Representative for the pro- 1.15 motion of the application
4
Copy of the Authorisation to provide insurance services
5.1
5
Certified copy of the Memorandum and Articles of Association of the applicant (Greek)
6.1
6
Suggested amendment of the Memorandum of 6.2 Association of the applicant
7
Certification of the existence of funds to increase the initial capital
7.4
8
Copy of the insurance document with regards the professional indemnity insurance
7.7
9
Chart of group structure
8.1.1
10
Certificate of the applicant’s shareholders
9.1
11
Questionnaire of the shareholders with qualifying holding
9.3
12
Certificates of the Shareholders of the legal persons - shareholders of the applicant
9.4
13
Certified true copies of identification cards or passports and certificates on non-bankruptcy and criminal record (natural persons) - certificate of good standing (legal person) - of the direct shareholder of the applicant
9.5
14
Certified true copies of identification cards or passports and certificates on non-bankruptcy and criminal record of the natural persons ultimate beneficial shareholders of the applicant
9.6
15
Chart of the organisational structure of the applicant
10.1
16
Certificate of Directors and Secretary of the applicant
10.2.1
17
Questionnaire of the Directors of the applicant 10.2.3
Submitted (√) / Not applicable (N/A)
Cyprus Investment Firms (CIFs) – Your Passport to Europe 28
18
Certified true copies of identification cards or passports and certificates on non-bankruptcy and criminal record of the Directors of the applicant
10.2.4
19
Questionnaire of the senior management of the applicant
10.3.2
20
Certified true copies of identification cards or 10.3.3 passports and certificates on non-bankruptcy and criminal record of the senior management of the applicant
21
Questionnaires, certified true copies of identification cards or passports and certificates on non-bankruptcy and criminal record of other persons that effectively direct
10.4
22
Certificates of registration/authorisation of service providers established in third countries
11.2.2
23
Description of the procedures of the central counterparty, clearing and settlement system
14.1.4
24
Internal regulation of operation of the applicant
17.1
24A
Checklist for the Internal Procedures Manual
17.2
25
Risk Management and Procedures Manual regarding money laundering and terrorist financing, according to paragraph
17.3
26
Annual Financial Accounts of the applicant - 3 years
18.1
27
Annual consolidated financial accounts of the group - 3 years
18.2
28
Business Plan of the applicant
19.1
29
Certificate of Good Standing of the applicant
20.1
30
Copy of authorisation of an applicant established in a third country
21.3
31
Certification by competent authority of the country of origin of the applicant - principle of reciprocity
21.4
32
Certification by external auditors and legal advisers of the applicant
22.1
Cyprus Investment Firms (CIFs) – Your Passport to Europe 29
CYPRUS INVESTMENT FIRMS (CIFS) Your Passport for providing Financial Services in European Markets
INFO www.eltoma-cyprus.com / www.eltoma-offshore.com Office 403, 10 Georgiou Gennadiou Street, 3041 Old Town, Limassol, Cyprus Tel: 0357 25 345 010 / Fax: +357 25 818 852