In addition, its past historical connection with the United Kingdom has given it the advantages of English based legal, accounting and banking systems, which have contributed to the development of the infrastructure necessary for Cyprus's growth as a financial centre. Cyprus law closely follows English law and nearly all the major international accounting firms are represented on the island. The local law firms are of a very high calibre, many of them specialising in international trusts, international tax planning and finance.
It was the combination of the above environment with the advantageous tax policies, introduced in 1975 - tax on profits from international business operations ranging from 0% to 4,25% - that triggered off the rapid evolution of Cyprus as an international business and financial centre.
As a result of Cyprus's success in becoming one of the world's primary international business centres for trading, investment and shipping activities, more than 36.500 international business companies and about 2.673 ships are currently registered in Cyprus. The development of the banking and financial services industry was therefore a natural consequence.
In this respect, Cyprus offers not only impeccable professional, technological services and ample skilled human resources to cater for international financial needs, but also an agreeable living environment combined with its people's welcoming attitude.
INTERNATIONAL BANKING
Cyprus has attracted a substantial number of international banks, its 34 International Banking Units (IBUs) / Administered Banking Units (ABUs) and 4 Representative Offices of foreign banks come from a variety of countries including: Belgium, Bulgaria, France, Germany, Greece, Jordan, Lebanon, Luxembourg, Romania, Russia, Switzerland, the UK and the USA.
Applications for the establishment of an IBU / ABU in Cyprus may only be submitted by foreign incorporated banks enjoying a good reputation internationally and which have an established track record of growth and profitability. Out of a total of 34 IBUs / ABUs, only 9 are locally incorporated the rest being branches of established foreign banks.
An applicant bank must originate in a country which exercises strict banking supervision. The Central Bank of Cyprus, always obtains the written consent of an applicant bank's home licensing and / or banking supervisory authority as well as its undertaking that it will exercise consolidated supervision over the global activities of the applicant bank, including the operations to be carried out from within Cyprus.
The Central Bank supervises IBUs / ABUs by both on-site inspections and by monitoring through the various prudential periodic returns which are submitted to it by IBUs / ABUs. The main purpose of the supervisory framework is to ascertain whether IBUs / ABUs abide by the conditions attached to their banking business licence and to verify that prudent banking policies are followed.
Cyprus is a tax incentive orientated country, but not a tax haven, and offers benefits aimed at foreign individuals and enterprises who wish to conduct their affairs in confidentiality, from within the island. Having stated the above, it must be emphasised that Cyprus is not prepared to tolerate criminal activity. In this regard, it should be noted that Cyprus has signed and ratified the "1988 U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention)" and the "1990 Council of Europe Convention on Laundering, Seizure and Confiscation of the Proceeds from Crime" on the basis of which the Cyprus House of Representatives has enacted the Prevention and Suppression of Money Laundering Activities Law of 1996. Under this law, a person is obliged to disclose to the Unit for Combating Money Laundering a suspicion or belief that any funds or investments are derived from or used in connection with all forms of serious criminal activity.
INTERNATIONAL FINANCIAL SERVICES COMPANIES
In the last ten years, there has also been a substantial growth in International Financial Services Companies ("IFC"s) which have established a presence in Cyprus. These IFCs originate from a variety of countries and offer a wide spectrum of financial services to the public, ranging from investment advice to the management of investment portfolios and the establishment and operation of collective investment schemes. The current number of IFCs offering financial services from within Cyprus is 105.
A person, whether natural or legal, submitting an application to the Central Bank for the establishment of an IFC, must be "a fit and proper" person before being allowed to be involved in the provision of financial services. An application for the establishment of an IFC is subject to a detailed vetting procedure and in this respect the applicants are required to complete specifically designed questionnaires, including details of their academic and professional qualifications as well as previous employment history.
The Central Bank, for instance, obtains a "Letter of Authorisation" from an applicant which enables it to exchange information with overseas regulatory authorities and to seek directly from other independent sources positive evidence of the good standing and experience of the applicant(s). It must also be emphasised that an applicant, in order to be successful, must be able to arrange for "Letters of Comfort", to be provided to the Central Bank, by overseas regulated financial services firm, with which the IFC will have a legal or other close business association.
INTERNATIONAL COLLECTIVE INVESTMENT SCHEMES
The Central Bank also welcomes applications for the establishment and management in Cyprus of International Collective Investment Schemes ("ICIS") which, at present, may take the form of either an International Public Investment Company ("IPIC") with fixed capital, with or without redeemable preference shares, established under the Cyprus Companies Law (by having redeemable preference shares an IPIC's paid-up capital can effectively be reduced if such flexibility is required) or as an International Unit Trust Scheme ("IUTS") constituted under the provisions of the 1992 Cyprus International Trusts Law.
A new law, which will govern the establishment and regulation of international collective investment schemes in Cyprus is expected to be enacted very soon which will consolidate into one law the regulation of existing forms of ICIS (i.e. IPIC and IUTS) and will introduce new forms of ICIS such as variable capital companies, investment limited partnerships and limited duration companies. The new law also provides for the authorisation of Trustees and Managers and its sets out their eligibility criteria and duties. Furthermore, it provides for the taxation of ICIS in a manner designed to encourage their establishment in Cyprus.
TRUSTS
In July, 1992, Cyprus brought in a new international trusts legislation. This is an excellent piece of legislation which has enhanced further the reputation of Cyprus as an international financial centre, creating the infrastructure for Cyprus to emerge as a major trust jurisdiction. The availability of the 27 tax treaties between Cyprus and other countries, together with the complete exemption from taxation of the income and profits of international trusts, can provide the international tax planner with a valuable tool for minimising the tax burden of a trust and its beneficiaries. Confidentiality is the cornerstone of the International Trusts Law of Cyprus, which ensures that the trustee of any other person, including officers of the Government and the Central Bank, may not disclose to any person any information or documents. In addition, the Cyprus International Trusts Law offers effective asset protection by making it difficult for third parties to invalidate the trust, even in the event of a settlor's bankruptcy, unless clearly fraudulent intention was behind the creation of the trust.
Good quality corporate trustee services are available in Cyprus from the trustee departments of banks, accountants and law firms as well as from international trustee services companies, which undergo the same vetting procedure as the one described for the establishment of IFCs above, prior to being permitted by the Central Bank to establish a presence on the island.
DOUBLE TAXATION TREATIES
Special mention deserves to be made to the double taxation treaties between Cyprus and the eastern European countries, including the members of the Commonwealth of Independent States (except Kazakhstan), Bulgaria, the Czech Republic, Hungary, Poland, Romania and the Slovak Republic. The existence of these treaties combined with the low tax paid by international business entities offer tremendous possibilities for international tax planning through Cyprus bearing in mind that:
- Any tax withheld in a country with which Cyprus has a treaty is deducted from the Cyprus tax payable on the same income;
- Dividends, interest and royalties paid by international business companies are exempt from Cyprus tax;
- Cyprus is not considered as a tax haven by most tax jurisdictions and is thus free from reservations usually associated with tax haven operations. In contrast to tax havens, Cyprus is a tax incentive country which offers incentives aimed at attracting foreign enterprises and individuals that wish to conduct their business activities from or through Cyprus.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances from a local lawyer or accountant.
