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Table
Of Statutes
This
is a non-exhaustive list of the main Cyprus statutes affecting
offshore business. The statutes are listed in alphabetical
order, and for each one there is a brief description of its
relevant content if it is not obvious from the title –
click on the statute for a fuller description of the statute
or the legal regime it forms part of.
Banking Business (Temporary
Restrictions) Law of 1939 (banking licences)
Banking Law 1997 (secrecy, confidentiality, offshore banking)
Banking Laws 1997 to 2009
Capital Gains Tax (Amendment) Law No. N119(I) of 2002
Central Bank of Cyprus Law 37 of 1975 (secrecy)
Companies Law Chapter 113 (types of company)
Companies (Amendment) Law of 2000 (Law 2(I)/2000)
Companies (Amendment) (No. 3) Law of 2000 (151(I)/2000)
Companies (Amendment) Law of 2001, Law 76(I) of 2001
Customs and Excise Duties Law 34
of 1975
The Cyprus Mutual Fund Law 2002
Cyprus Trustee Law Chapter 193
Exchange Control Law Chapter 199
Income Tax (Amendment) Law 15 of 1977 (set up offshore
regime)
Income Tax Law No. 118(I) of 2002
Insurance Companies Laws 1984-1990 (deals with captives)
Insurance Regulation 1995 (deals with captives)
International Collective Investment Schemes Law No. 47 (1)/99
International Trusts Law 69(I) of 1992
Investment Services and Activities and Regulated Markets Law
2007 (Law 144(I)/2007)
Legal Framework for Electronic Signatures and for Relevant
Matters Law (N.188(I)/2004)
Liberalisation of Investment Laws 1997
Merchant Shipping (Registration of Ships, Sales and Mortgages)
Law 45 of 1963
Merchant Shipping (Fees and Taxing Provisions) Law 38(I) of
1992
Merchant Shipping (Fees and Taxing Provisions) Law 2010
Partnership and Business Names Law Chapter 116
Prevention and Suppression of Money Laundering Law 1996
Prevention and Suppression of Money Laundering Law 2008
Regulation of Electronic Communications and Posts Law (112(I)/2004)
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Cyprus Trust Law
Cyprus trust law began with the Cyprus
Trustee Law Chapter 193, based on the English Trustee Act
1925, but the island's trust regime was brought into line
with normal international practice with the International
Trusts Law 69(I) of 1992. The result is that there are three
types of trust available, of which only the last will normally
be of interest to the international settlor:
Local Trusts are governed by English
common law and the original Trustee Law. The settlor and beneficiaries
are normally residents of Cyprus, and the trust and its property
are subject to exchange controls.
Offshore Trusts are equally outside the
International Trusts legislation, and are the same as Local
Trusts except that their beneficiaries must be non-resident
and all the trust's activities must be outside Cyprus.
International Trusts are the normal form
of Cyprus Trust used by foreign settlors. International Trusts
have the following key characteristics:
- the settlor must be non-resident
- the beneficiaries must also be non-resident
(except for local charities)
- one of the Trustees must be Cypriot
(individual or corporate)
- the trust period may be up to 100 years
(longer for charitable trusts)
- confidentiality is protected in the
law, and foreign judgements are specifically non-recognized
- there is no registration requirement
- trust documents are in English
- trust assets may not include immovable
property in Cyprus
- creditors have to prove intent and
must claim within two years
- there is Stamp Duty of CYP250
- broadly speaking, the income and assets
of International Trusts are not taxable in Cyprus
It is often possible to combine Cyprus
International Trusts with the island's network of double-tax treaties to create very advantageous
results.
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Cyprus Banking Law
For the offshore investor, Cyprus banking
law provides a reasonable but not outstanding level of non-disclosure.
Offshore entities must disclose beneficial
ownership to the Central Bank on formation, but Central Bank
employees are bound to secrecy by Section 3 of the Central
Bank Law 37 of 1975 (now Section 29 of the Banking Laws 1997
to 2009). Offshore entities also have to disclose this information
to their local agent, but he can only be forced to divulge
it with a Court Order.
Trustees do not have to register the
beneficiaries of a trust, but a trustee opening a bank account
must disclose beneficial ownership. Confidentiality on the
part of commercial banks is covered by the Banking Law 1997.
Normally speaking, local banks apply about the same standards
of confidentiality as apply in English law. In December, 2003,
the Government announced plans to breach banking confidentiality,
allowing the tax authorities access to residents' bank accounts.
This made it possible for the government to run a tax amnesty
scheme targetting those with undeclared bank accounts.
The rules for exchange of information
with foreign states are a complex mixture of the local taxation
laws, the network of double-tax treaties, and international
agreements for mutual legal assistance and the exchange of
information to which Cyprus is a signatory, now further complicated
by the EU acquis communitaire which substantially worsens
the position of individuals and corporations as regards secrecy.
However Cyprus law does provide for normal judicial appeal
procedures against treaty requests for information and cooperation.
The Cyprus Government has taken strong
measures to prevent the use of the island for money laundering,
partly in response to an influx of doubtful money and unwanted
organizations from Russia and other CIS countries in the early
nineties. The Prevention and Suppression of Money Laundering
Law of 1996 has been largely successful: in April 1998 a Select
Committee of Experts from the Council of Europe reported enthusiastically
about the island's measures to control money laundering.
On December 13, 2007, the House of Representatives
enacted an updated Prevention and Suppression of Money Laundering
Activities Law, which consolidated, revised and repealed the
1996 law. Under the current Law, which came into force on
January 1, 2008, the Cyprus legislation has been harmonised
with the Third European Union Directive on the prevention
of the use of the financial system for the purpose of money
laundering and terrorist financing (Directive 2005/60/C).
The present Law, as the previous one,
designates the Central Bank of Cyprus as the competent supervisory
authority for persons engaged in banking activities and money
transfer business. Under this framework, the Central Bank
of Cyprus has the responsibility of supervising and monitoring
the compliance of banks and money transfer businesses with
the provisions of the Law for the purpose of preventing the
use of the financial system for money laundering and terrorist
financing activities.
Since 1997 and by virtue of the powers
vested to it under the Law, the Central Bank of Cyprus issued
several Directives to banks and money transfer businesses
which determine the practice and procedures that should be
implemented by those entities for the effective prevention
of money laundering and terrorist financing so as to achieve
full compliance with the requirements of the Law.
In April 2008, the Central Bank of Cyprus
has issued a revised Directive to the banks, in accordance
with the provisions of the Law of 2007, requiring the introduction
of new revised policies and procedures, as well as the upgrading
and enhancement of the measures and systems for the effective
prevention of money laundering and terrorist financing in
line with the FATF standards and the Directives of the European
Union in this sector. It is emphasized that the Law explicitly
states that Central Bank of Cyprus’ Directives are binding
and compulsory to all persons to whom they are addressed.
Since 1997, a special Unit for Combating
Money Laundering has been set up at the Attorney General’s
Office which is responsible for the receipt and analysis of
suspicious transaction reports and money laundering investigations.
In the course of money laundering investigations, this Unit
may apply to the Court and obtain an order for the disclosure
of information addressed to any person, including banks, who
may be in possession of information related to the investigation
as well as orders for the freezing and confiscation of funds
and property suspected to be derived from money laundering.
On April 14, 2011, legislation was enacted
to introduce a special bank levy under which financial institutions
operating in Cyprus will be required to pay 0.095% on the
total amount of deposits held at the end of each calendar
year. See Cyprus Domestic Corporate
Taxation for more details on the bank levy.
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Cyprus Investment Company Law
Cyprus Private Investment Funds, known
as private International Collective Investment Schemes (ICIS),
are private funds that can be formed under the laws of Cyprus.
The Central Bank of Cyprus is the regulatory and supervisory
authority for ICIS under the International Collective Schemes
Law 47 (I) 1999 (the ICIS Law).
A private ICIS fund can have up to 100
investors, also known as unit-holders. The purpose of a private
ICIS fund is the collective investment of funds injected in
such schemes by the unit-holders. It provides an arrangement
that enables a number of investors to add collectively their
assets, have these professionally managed and invested by
independent managers and extract their profits in a tax efficient
manner.
Under the legislation, therefore, a Scheme
may take one of the following forms:
- International Fixed
Capital Company (IFCC): Incorporated under the
Companies Law and recognised to operate as an international
fixed capital company by the ICIS Law. Its assets and unit
holders are non-Cypriot residents and the share capital
cannot vary, it remains fixed. The initial minimum capital
required to set up an IFCC is USD100,000. If the IFCC is
a private ICIS then it is exempted from this capital requirement.
A private ICIS is one that has 100 or less investors.
- International Variable
Capital Company (IVCC): Incorporated under the
Companies Law and operates as an international variable
capital company by the ICIS Law. Its assets and unit holders
are non-Cypriot residents and the share capital varies according
to the participating investors at any given time. The share
capital of the company is equal to the net asset value (NAV)
of the shares of the company at any time.
- International Unit
Trust Scheme (IUTS): An international trust created
under the International Trust Law and recognised to operate
as an International Unit Trust Scheme under the ICIS Law.
(See Cyprus International
Trusts). The assets are owned by the Schemes Trust in
fiduciary for the trust beneficiaries
- International Investment
Limited Partnership (IILP): A limited partnership
registered under the Partnerships Law and recognised to
operate as an international investment limited partnership
under the ICIS Law. As with all limited partnerships, there
must be a general partner appointed who manages the fund
and is responsible for the assets and liabilities of the
fund. The limited partner will also be a member of the scheme.
A general partnership can also have companies as partners.
All four legal types of Schemes, can either
be of limited or unlimited duration.
A Scheme, once recognised, may be designated
by the Bank as:
- A Scheme to be marketed to the general
public; or
- A Scheme to be marketed solely to experienced
investors; or
- A private international collective
investment scheme.
A manager of a Scheme must be approved
by the Bank. In this respect, a manager must on an ongoing
basis, satisfy, the Central Bank that, having regard to the
investment policy and the particular investment objectives
of the Scheme for which it acts as manager that it has sufficient
financial and operational resources at its disposal to meet
its liabilities, as well as sufficient investment expertise
to conduct its business effectively.
Trustees of Schemes must also be approved
by the Central Bank. Under the Law, only the following can
act as trustees of Schemes:
- A Cyprus local or international bank
or an overseas bank established in a jurisdiction which
in the opinion of the Bank exercises adequate banking supervision
and which has such minimum paid-up share capital as the
Bank may from time to time prescribe; or
- A local or international or an overseas
professional trustee company which is adequately supervised
and which has such minimum paid up share capital as the
Bank may from time to time prescribe; or
- A company incorporated in the Republic,
which is a subsidiary of a person referred to at (1) and
(2) above, provided that its liabilities are fully guaranteed
by that person.
Every Scheme, its manager and trustee
are subject to on-site inspections by the Central Bank of
Cyprus. In addition, the Bank may, under certain circumstances,
apply to the Court in order to appoint an inspector to investigate
the affairs of the Scheme, its manager or trustee, or any
associated undertaking of any of the aforementioned.
Every Scheme, its manager and trustee
will also be subject to off-site monitoring and will, therefore,
be required to furnish the Bank with such information and
returns concerning the business of the Scheme, its manager
or trustee as the Bank may specify from time to time.
Cyprus Investment Firms
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.
Taxation of Collective Investment Schemes
In 2009, the The Cyprus Income
Tax Law N.118(I)/2002 was amended to clarify that interest
income earned by a collective investment scheme (CIS) is subject
only to income tax (less any allowable expenses) and exempt
from the Special Defence Contribution. This amendment was
made in a bid to attract more investment schemes to set up
and operate from Cyprus and to improve taxation for companies
holding interests in Cypriot and non-Cypriot CISs.
In addition, the changes mean
that the redemption of a unitholding in a collective investment
scheme will not be considered as a reduction in capital under
the Special Defence Law, therefore there will be no tax obligations
on the distribution arising from the redemption.
Furthermore, the Special Contribution
for Defence Law was amended in order to abolish the minimum
participation requirement of 1% when it relates to dividends
received from abroad by a Cyprus tax resident company. This
makes it easier for portfolio investors to benefit from the
dividend participation exemption.
The result of the amendment is
that interest earned by a Cypriot company is now reduced to
a maximum rate of 10% in all cases, whereas prior to the change,
interest income could be taxed at 15%. The amendment was approved
by parliament on October 22, 2009 and came into immediate
force.
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