When conducting business as an international financial institution, the jurisdiction where an institution’s main operations are located is crucial. As such, any internationally active financial institution should go through the process of selecting a suitable jurisdiction for its headquarters and primary place of operation.
Depending on each financial institution’s needs, there are plenty of jurisdictions of choice out there, each one with its own set of benefits and drawbacks. Instead of analysing the pros and cons of a series of candidate jurisdictions, this article will focus exclusively on Cyprus as a preferred destination.
During the last decade, Cyprus has become one of the most advantageous and favorable jurisdictions for CFD and other types of online brokers, as well as Payment Institutions, Financial Advisors, Asset Managers and Fund Managers.
Despite Cyprus being a relatively small island, there are many reasons for its success:
- Location (proximity to Africa, the Middle East, the CIS and Europe);
- EU Membership;
- A favorable tax regime;
- A friendly business environment;
- Compliance with the European regulatory framework;
- An advanced infrastructure;
- A highly–educated and skilled workforce, and;
- Cost-efficiency.
An international financial institution must consider many factors to effectively migrate its operations to Cyprus, including legal and corporate matters, tax, licensing, regulatory, and human resources (HR), among others. Below we take a closer look at each one of these areas.
1. Choice of Consultant
One of the first steps a financial institution should take is to identify a suitable and knowledgeable local consultant who can advise the organisation on matters regarding its relocation or initial establishment. This consultant should be able to assist the institution on legal and corporate matters, licensing, regulatory, tax, accounting/auditing, and HR, to name a few. The institution should consider the following factors when selecting a consultant:
- Years of experience;
- Track record;
- Size of the team;
- Qualifications, knowledge and experience of its team members;
- Pricing;
- Range of services and solutions, and;
- Areas of expertise.
2. Legal/Corporate Structure
During the past two decades, Cyprus has been an important center for the establishment of solid business structures, thanks to the fact that the Cypriot legal system models itself after the UK’s common law system, one that offers greater security and stability. Because Cyprus affords security of owning assets through legal entities, many foreign entities establish a Cyprus Holding Company to own their subsidiaries throughout the world. This strong legal system provides security and safety and assures its owners that their assets are well protected. Tax may not be the first consideration of most foreign persons, but safety of ownership has become the primary reason for establishing a Cyprus Holding Company.
3. Tax/Accounting/Auditing
Considering Cyprus’ legal system, foreign institutions established on the island can accumulate tax-free profits/dividends in a Holding Company, and these profits are available at any time for distribution to its owners without incurring any withholding tax on the payment of such dividends.
Cyprus offers one of the lowest tax rates in Europe at 12.5% on net profits. Other major tax advantages include:
- Dividends received from any active subsidiaries are not taxed;
- Profits derived from disposal/trading in financial instruments that have as underlying assets other entities’ shares or titles are not taxed in Cyprus;
- Capital gains from the disposal of property held abroad is not taxed;
- Deductions of either 20% or 50% from employment are allowed under certain conditions from the remuneration earned by foreign persons coming to Cyprus to work;
- No withholding tax on outgoing payments;
- Extensive double tax agreements in place to avoid double taxation from foreign operations, and;
- No tax on dividends and interest received by persons establishing their residency in Cyprus (non-domiciled persons).
A Cyprus licensed entity is required to keep accounting records that should be updated on a regular basis. Furthermore, Cyprus companies are required to audit their financial statements to be submitted to the Registrar of Companies and regulator each year.
Experienced auditors in the area of Financial Services can offer quality audit services, adding value to the institution by offering feedback on the institution’s operations, internal control systems and weaknesses.
4. Licensing
Licensing is one of the first steps a financial institution must proceed with when moving its operations to Cyprus. Licensing can be a challenging, time-consuming and demanding process; however, with the right guidance and consultation, it can be easily managed.
Depending on the services a financial institution will provide, it is essential to submit early on an application to the relevant regulator. There are three main institutions in Cyprus regulating the financial sector:
- The Cyprus Securities and Exchange Commission (CySEC), which regulates Funds, Fund Managers, Broker-Dealers, Financial Advisors, Investment Banks, and Asset & Wealth Managers;
- The Central Bank of Cyprus (CBC), which regulates Credit, Payment and E-Money Institutions, and;
- The Insurance Superintendent, which regulates Insurance Providers and Insurance Advisors.
All licensing processes involve a number of components, including:
Drafting of operational manuals and a realistic business plan:
The essence of any licensing application is the process of explaining an institution’s business operations and vision to the regulator in a way they may understand the prospect an institution is aiming to fulfil, as well as any potential associated risk involved.
Realistic financial projections and planning:
The effective demonstration to the regulator that the business has in place adequate and legally accrued capital to support the institution and its clients, at the start of operations or if any internal or external risks arise, is at the core of most licensing applications.
Accurately completed application forms and correct documentation:
It is imperative that the regulator is correctly informed of the people responsible for controlling the business. These may be the ultimate beneficiaries, as well as the senior management that will run its day-to-day operations. The required application forms and documents aim to assist the regulator in their assessment of whether or not these individuals are fit and proper to manage a regulated institution.
Implementation and set-up of policies and procedures:
The preparation of appropriate operational policies and procedures in order to meet the expected standards is another key component of the licensing process. This is the foundation for the institution’s compliance framework and governance and allows the company to start off on the right foot with respect to regulatory matters.
5. Compliance
In today’s financial services sector, businesses are largely driven and affected by developments in the regulatory landscape.
Compliance is now so integrated with the financial institutions’ daily operations that, in almost all cases involving their daily activities, developments cannot proceed without the prior review and approval of their compliance specialists. For example, marketing campaigns, acquisition of new clients, issuance of new products and changes in the terms of business with clients require the review and pre-approval of the compliance team prior to implementation.
Financial institutions are under heightened scrutiny and there is a need to establish dedicated compliance roles to protect the organisation from reputational damage and costly penalties.
The principal responsibility of a compliance function is to ensure that the financial institution consistently applies best practices as indicated by the legal framework and that the rules are being followed and implemented as set by the established regulations.
Every financial institution should work or partner up with a specialised compliance advisor. A right compliance advisor can perform an integral role, providing highly specialised technical support in compliance and a wide range of expertise and support, while understanding particular business needs and translating these into practical advice and action plans for the internal compliance departments. A suitable compliance advisor should also be able to bridge the gap between law and practice, identifying and finding solutions to problems and providing full management support in relation to all compliance activities, such as communicating with regulators, drafting reports and keeping companies up-to-date with regulatory developments and new requirements.
6. Human Resources
Cyprus has always been an attractive place for permanent employment in Europe due to its ideal location, perfect climate, strong educational culture, reasonable cost of living and lifestyle, among others. As a result, over the last few years, Cyprus has become an international mobility center and an efficient vehicle for talent management.
Alongside an optimal taxation system and flexible employment terms and conditions, multinational companies operating in Cyprus can enjoy efficient, cost-effective and compliant employment and a deployment of resources that suit their needs.
To make the most out of these benefits, a financial institution should work with a dedicated and specialised HR consultant who has intrinsic knowledge of the financial services sector and can anticipate the institution’s needs in order to provide world-class service. In this regard, Cyprus has a strong workforce of highly educated and specialised professionals.
Competent and reliable business support services include:
- Executive talent search;
- Headhunting;
- Employment contract advice based on local regulations;
- Preparation of contractual documentation;
- Permanent and fixed term placements;
- Effective talent management, and;
- Employee support if needed (relocation, work permit, visa, etc.).
7. Location and Infrastructure
There are four major cities in Cyprus: Nicosia, Limassol, Larnaca and Paphos. Nicosia is Cyprus’ capital and the island’s largest city. Most of the locally owned businesses and public authorities are based in Nicosia. On the other hand, Limassol comes in second in terms of size yet attracts most of the foreign business community. Limassol has the largest international community on the island and is the ideal location for a foreign financial institution to setup its offices.
The financial institution’s premises are also important. They should provide security, meet regulatory requirements, possess the necessary infrastructure, and offer a great working environment for employees to enjoy.
8. Banking
Every financial institution planning to relocate to Cyprus should cooperate with a local bank. There are plenty of choices of local banks and almost all of them offer similar services. Establishing a business relationship with a local bank is crucial so that an institution can easily and effectively execute local payments to suppliers and employees and maintain its working capital.
The most important factor when choosing a banking partner is to work with a bank that possesses strong financial soundness and experience in servicing other financial institutions and has the necessary banking infrastructure to meet the financial institution’s local and global banking needs.
9. Training
Cyprus has a strong education culture among its labor force, one that leads to a highly educated and specialised workforce. Per the latest available data, Cyprus has the highest tertiary education percentage within the EU at 54.6% of the population compared to the EU average of 38.7%. Additionally, public expenditure on education in Cyprus continually exceeds the EU mean.
For the financial services sector, workforce training is highly regulated and controlled, with the legal framework imposing a specific level of professional knowledge and competence for people working in the sector. More specifically, professionals employed in the front line of Investment Firms or in a Regulatory Compliance capacity need to sit CySEC’s examinations to become members of the Public Registry of Certified Persons. Furthermore, members of this registry need to submit a minimum of 10 CPD units per year for their re-registration, ensuring their continuous education on current and upcoming regulations.
Due to recent developments in the regulatory framework, there has been an increased demand for specialised and continuous training for Regulatory and AML Compliance Officers, as well as for Risk Managers and Directors of firms who have seen their roles and responsibilities grow in importance.
Furthermore, as a result of continuous scrutiny by the regulator and increased competition among members of the workforce, there is a strong and growing demand for specialised professional qualifications in Cyprus offered by international qualifying bodies like ACAMS, CISI and CFA, to name a few. This has transformed Cyprus into an incredibly dynamic hub for a highly educated and relatively cheap labour force for the financial services sector.
