Cyprus: Law of Offshore
Cyprus Investment Firms (CIF) are companies established in Cyprus and licensed by CySEC to provide one or more investment services to third parties or/and perform one or more investment activities under the applicable laws and regulations. Accordingly, an Investment Firm licensed in Cyprus, can be used for the provision of investment services from Cyprus in all EU markets by simply passporting its license, while it can also offer investment services to third countries. CIFs are governed by Law 144(I)/2007, which replaced the Investment Firm Law of 2002.
The services can be offered on a cross-border basis or by establishing a physical presence in the jurisdiction into which the services will be provided. Cyprus Investment Firms, extensively used for forex trading, brokerage services, investment portfolio management and investment advice, benefit from Cyprus’s 10% corporate tax rate.
Investment Services subject to authorization by CySEC consist of the following services:
- Reception and transmission of orders in relation to one or more financial instruments;
- Execution of orders on behalf of clients;
- Dealing on own account;
- Portfolio management;
- Investment advice;
- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;
- Placing of financial instruments without a firm commitment basis; and
- Operation of Multilateral Trading Facility.
Ancillary (non-core) Services subject to authorization by CySEC consist of the following services:
- Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management;
- Grant 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;
- Provide advice to undertakings or capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings;
- Provide foreign exchange services where these are connected to the provision of investment services;
- Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments;
- Services related to underwriting; and
- Safe custody services.
However, it must be noted that a licence cannot be granted for the provision of non-core services alone.
Law 144(I)/2007 was published in the Cyprus Gazette on November 26, 2007. This legislation, effective November 1, 2007, brought Cypriot investment law into compliance with the European Union Markets in Financial Instruments Directive (MiFID). MiFID is a European Union instrument which provides a harmonized regulatory regime for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union plus Iceland, Norway and Liechtenstein). The main objectives of the Directive are to increase competition and consumer protection in investment services. MiFID retained the principles of the EU ‘passport’ introduced by the Investment Services Directive (ISD) but introduced the concept of ‘maximum harmonization’ which places more emphasis on home state supervision.
As a result of the legislation, CIFs are required to classify their clients as retail clients, professional clients or an eligible counterparty as follows:
- Retail Client: a client who is neither a professional client nor an eligible counterparty and who receives the highest level of protection under Law 144(I)/2007 Sections 36, 38 and 39.
- Professional Client: a client who possesses the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that they incur.
- Eligible Counterparty: any of the following entities which a CIF is authorized to receive and transmit orders, and/or to execute orders on behalf of clients, and/or deal on own account: CIFS, credit institutions, insurance undertakings, UCITS, pension funds, and other financial institutions authorized by an EU member state or regulated under community law.
The law stipulates that investment advisers must be suitably qualified. It is a criminal offence to accept payment for investment services without a licence under the law. Those found guilty of an offence under the law face fines, imprisonment, or a ban from providing investment services for up to five years.
An investment company must satisfy the following requirements before a licence will be granted under Law 144(I)/2007:
- Initial share capital:
- for reception, transmission, execution, portfolio management and investment advice: EUR200,000
- For reception, transmission, investment advice without handling any clients’ funds/instruments: EUR80,000
- for professional indemnity insurance with coverage in all member state countries for at least EUR1m for each loss and a total of 1.5m annually for all losses due to negligence: EUR40,000
- for own account, underwriting and operation of Multilateral Trading Facilities: EUR1m
- for reception, transmission, investment advice without handling client funds/instruments and insurance intermediary: EUR40,000
- for professional indemnity insurance with coverage for all member states for at least 500,000 for each loss and 750,000 for all losses for each year: EUR20,000
- The memorandum of association of an investment company must state that it is operating as an investment company and provides the services provided in their license, which was granted to them by the Cyprus Securities and Exchange Commission.
- Company directors must have good standards of integrity and experience, and the company must be managed by at least two such people. Similarly, the employees of the investment company must have sufficient integrity, skills, knowledge and expertise so as to be able to carry out their duties properly.
- The names of the shareholders or beneficial owners of the investment company must be disclosed.
- The head office of the investment company must be located in Cyprus.
- The investment company must be a member of the investors compensation fund.