Cyprus’ re-emergence as a Mediterranean business champion has been marked by a rapidly diversifying financial services sector. Moving well beyond banking and corporate formation, the island is today positioning itself as a home for investment fund managers, crowdfunding platforms and fintech entrepreneurs
The key features of a Cyprus Company Formation are:
Cyprus Offshore Companies and their Tax Liability
One of the key benefits of using a Cyprus offshore company is that Cyprus has double-tax treaties with well over 45 other countries, including most major Western’high-tax’ countries and most Central and Eastern European states.This is unusual for a tax haven and means that Cyprus is a very good choice for holding and investment companies. It’s also on the OECD ‘white list’ and has implemented numerous tax information exchange agreements.
Income tax rates vary from 20% to 30%, although there is a special 5% rate for pensioners and there is a generous 19,500 Euros exemption for each individual. However, the beauty of Cyprus for an offshore company formation is in the exemptions. All of the following are free of income tax:
Cyprus has gained increased prominence due to its treaties with Eastern European countries. These enable a Cyprus legal entity to extract profits from Eastern European countries at a reduced tax rate or with no tax payable at all. This is thanks to the nil (or low) rates of withholding taxes on dividends, interest and royalties laid out in the treaties.
Given that many Eastern European countries are seeing increased inward investment, the interest in Cyprus companies (in order to take advantage of these low withholding taxes) is likely to continue growing.
The treaty with Russia, for example, allows a Cyprus holding company to incur withholding tax at 5% on dividends and royalties from a Russian subsidiary, rather than the standard 15%.In addition, the Cyprus company will be exempt from income tax on the dividend income and may be able to claim an exemption from the 15% defence fund contribution.
For companies, Cyprus imposes corporation tax on companies that carry on business or have an office or place of business (permanent establishment) in Cyprus. Cyprus now has a 10% corporate tax rate, which applies to all companies. This gives Cyprus one of the lowest corporation tax rates in Europe. Unlike the UK and the US the shareholders are not liable to income tax on dividends when profits are extracted from a company, although any resident shareholders must pay the 15% special contribution to defence (if you’re non-resident you’re exempt from this).
Strong Banking and Insurance
Cyprus’ banking sector is a symbol of the island’s reform process following the 2013 crisis. The industry was forced to restructure and consolidate; and today the country has a much stronger national banking sector than a few years ago. Cypriot banks enjoy strong capital ratios, and the rate of non-performing loans has been reduced by half. International banks continue to use the island as a launch pad into high-growth and emerging markets. More than 30 foreign banks are operating in Cyprus, which mainly carry out international banking business and have limited interaction with the domestic economy.
Cyprus’ insurance sector is performing well; posting premium growth year-on-year. However, insurance in Cyprus focuses mostly on domestic business. While the island is home to 30 insurance companies, only a small number of them are writing business outside of Cyprus and taking advantage of EU passporting rights. Industry experts are of the opinion that this segment of the financial sector could be developed further, highlighting that Cyprus is particularly well positioned as a base for companies wishing to do business in the EU and the Middle East region.
Available Funds in Cyprus
The most popular investment fund structures in Cyprus consist of Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) with emphasis on the latter.
Pursuant to the applicable legislation, an AIF can be structured as either a common fund (a contractual agreement) or an investment company (Variable/Fixed capital) or a limited partnership (LP). On the other hand, a UCITS may be structured as either a common fund or a variable capital investment company.
Each of the above available fund structures can be established with various investment compartments which allow for the segregation of assets and liabilities between compartments. Each one of the Investment Compartments may differ in terms of investment policy, minimum subscription amount, redemption terms etc.
Cyprus’ investment funds sector has surprised the global asset management community with its fast growth. A sector that was nearly non-existent a few years ago, Cyprus catapulted itself into recognition by overhauling and modernising the sector’s regulatory framework. Assets under Management (AuM) have increased by 200% from €2.7 billion in 2016 to €8.3 billion in 2019, demonstrating that Cyprus is able to compete with Europe’s longer established fund domiciles.
Why set up a Fund in Cyprus
The recent upgrade and further consolidation of the current Cyprus legislative framework in respect of investment funds has contributed in Cyprus being considered as a European and International Investment Funds Hub accommodating sophisticated fund structures as well as fund managers.
Being one of the first EU member states to transpose the Alternative Investment Fund Managers Directive into national legislation and together with the enactment and constant modernization of the Cyprus Alternative Investment Funds Law, Cyprus has transformed in an attractive and competitive environment for the evolvement of the national alternative investments industry.
With banks’ capital needs constantly growing given the increased volatility of financial markets and in the wake of new regulations setting stricter capital definitions, banks are required to hold larger amounts of capital to sustain credit availability, absorb losses and demonstrate their financial strength. Regulatory capital remains the dominant capital metric with RWAs being central to the calculation of a bank’s capital ratio. The scarcity of fresh capital drives banks to explore better capital management through tactical actions and strategic decisions.
For more than 20 years, Cyprus has been the jurisdiction of choice for Foreign Exchange (Forex) and Contracts for Difference (CFD) brokers, and the country hosts a thriving industry and headquarters for many global giants in the field. Cyprus became popular due to low corporate tax rates, excellent infrastructure and an efficient regulatory framework under the supervision of CySEC, which is fully aligned with EU directives and European MiFID regulations. Cyprus was the first country in the EU to regulate the foreign exchange market, and CySEC is credited with attracting foreign companies to set up Cyprus Investment Firms (CIFs). With years of expertise and advanced infrastructure in electronic platforms, Cyprus offers strategic advantages that have positioned it among the most attractive destinations for international forex business.
Fintech & Crowdfunding Driving Growth
The future of finance will be very much determined by financial technology. Cyprus’ Innovation Hub has attracted start-ups and entrepreneurs working on tools that are utilising technologies such as Internet of Things (IoT), Artificial Intelligence (AI), blockchain and cloud computing for fintech and regtech purposes. Other projects are involving big data and crypto assets. While the ‘Hub’ only reviews and provides non-binding feedback to the companies operating under its umbrella, the initiative indicates Cyprus’ ambition to become a key player in the digital finance field. In fact, Cyprus’ innovation agenda is wide-ranging, covering everything from tax incentives for fintech firms, a Startup Visa Scheme to attract and retain tech talent and the establishment of a €20 million fund with an emphasis on start-ups and innovative companies. The island is also assessing whether it needs to change existing legislation to account for the use of new technologies.
Regional Business and Management Hub
Corporate formation remains one of Cyprus’ areas of specialisation. Blue-chip corporations and corporate planners continue to establish holding, trading and investment companies on the island to channel investments into key markets worldwide. Cyprus’ stable EU environment and neutral political stance, coupled with its low corporate tax rate at 12.5% and tax treaties with 65 countries, have made the island a prime destination for the structuring of investments into Europe, the Middle East and Africa, as well as Russia and Eastern Europe.
More recently, Cyprus has also begun posting growth as a regional and international headquartering location. Over the last five to 10 years, the island’s advantages as a business hub became ever more ingrained, with many multinationals basing operational or corporate management functions on the island. Companies such as NCR, Kardex, Amdocs, Bernhard Schulte Shipmanagement and Wargaming have all established headquarters on the island.
The Cyprus Stock Exchange
The Stock Exchange currently operates a Regulated Market and a Market in the form of Multilateral Trading Facility ( the ‘Emerging Companies Market’), which operate under the Cyprus Securities and Stock Exchange Law and the Investment Services and Activities and Regulated Markets Law (MIFID). Main participants of the Stock Exchange are the Members of the Stock Exchange (brokerage offices), listed issuers and investors.
Additionally, in accordance with the Securities and Cyprus Stock Exchange (Central Securities Depository and Central Registry) Law, the Stock Exchange has the responsibility for the establishment and management of a Central Depository and Central Registry (CSD). Securities listed on the Cyprus Stock Exchange are registered in the CSD and also unlisted securities, whose issuer wishes the maintaining of the registry by the Cyprus Stock Exchange.