Whether you wish to open a forex trading, broker service, portfolio management, investment or financial advisory firm in Cyprus you will be required to obtain a Cyprus Investment Firm License.  The core legal framework, registrational procedures and operational requirements of investment and ancillary services in Cyprus is governed by the Cyprus Investment Firms Law 144(I)/2007 and adopts provisions from the Markets in Financial Investments Directive.  As such, a CIF license is valid throughout the EU and thus opens doors to a very large and diversified market whilst maintaining a relatively low and efficient tax rate.  What’s more due the Republic’s advantageous location, a CIF can act as regional office for operation within the Middle East countries.   

In terms of tax advantages, Cyprus Investment Firms that are headquartered, fully staffed and operated from the island and as such are classified as local tax residents subject to corporate income tax in the Republic enjoy enticing benefits and incentives.  They are fully exempt from tax on dividends from own investments, including the mandatory 15% tax on dividend distribution imposed to its citizens by the Russian Federation, withholding tax on payments to its non-resident shareholders, Special Defense Contribution tax on dividends received from resident and non-resident companies as well as capital gains tax from sale of shares, bonds or debentures.  

In order to qualify as a licensed Cyprus Investment Firm, the company’s main economic activities must fall within the scope of the below mentioned investment services and the minimum required share capital of the company strictly depends on the type of service provided and the risk group that it falls under, as follows:

For clarification purposes CySec defines financial instruments as follows: transferable securities; money market instruments; units in collective investment undertakings; options, futures, swaps, forward rate agreements and other derivative contracts; financial contracts for differences.

In addition to the above, a licensed CIF may also provide any of the following non-regulated ancillary services, however, a license will not be granted if the below are the sole business activity of the company:

• Administration and safekeeping of financial instruments on behalf of clients
• Safe custody services
• Advice on industry strategies, capital structures and other related matters
• Services related to foreign exchange
• Provision of credit and loan facilities to investors for transaction purposes
• Financial analysis or investment research
• Underwriting services

It is important to note that as of 21st of June 2021, a new prudential regulatory framework will come into force in all EU member states, that will also affect the Cyprus Investment Firm.  This new regulatory framework comprises of Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (the IFR) and Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (the IFD).

Under the new framework, a new classification system will be introduced for CIFs that will be primarily based on the systematic importance, main economic activities, size and interconnectedness of the investment firms which will now be categorized as follows:

Class 1A: This class is assigned to large, systemically relevant investment firms that are similar in business activity to credit institutions, that however, do not meet all the criteria to qualify as a full-fledged credit institution, in that they are not permitted to hold deposits or other repayable funds nor is it a commodity and emission allowance dealer, a collective investment undertaking or an insurance undertaking.  These investment firms will be reclassified as credit institutions and will now need a credit institution authorization supervised under the CRR2/CRDV capital framework if it meets any of the following conditions:

• the total value of the consolidated assets of the undertaking is equal to or exceeds EUR 30 billion;
• the total value of the assets of the undertaking is less than EUR 30 billion, and the undertaking is part of a group the total value of the consolidated assets of all undertakings in which individually has total assets of less than EUR 30 billion and that carry out any activities related to dealings on own account or underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis equal to or exceeds EUR 30 billion;
• the total value of the assets of the undertaking is less than EUR 30 billion, and the undertaking is part of a group the total value of the consolidated assets of all undertakings of which is equal to or exceeds EUR 30 billion and which engages in underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis or dealings on own account activities.

Class 1B:  This category is assigned to investment firms that fall under the same category as Class A above but whose consolidated assets (or group) do not equal or exceed EUR 15 billion.   These will remain regulated investment firms under CySEC but will also be supervised under CRR2/CRDV for prudential requirements.

Class 2: This class will be assigned to investment firms which do not meet any of the conditions of Class 1A, Class 1B or Class 3 and thus will be subject to the new IFR and IFD regime. 

Class 3: This class is assigned to small and non-interconnected investment firms provided, they meet all the conditions prescribed below:

• Assets Under Management (AUM) is less than EUR 1,2 billion;
• Client Orders Handled (COH) measured in is less than either EUR 100 million/day for cash trades or EUR 1 billion/day for derivatives;
• Assets Safeguarded and Administered (ASA) is zero;
• Client Money Held (CMH) is zero;
• Daily Trading Flow (DTF) is zero;
• Net Position Risk (NPR) or Clearing Margin Given (CMG) is zero;
• Trading Counterparty Default (TCD) is zero;
• The on‐ and off‐balance‐sheet total of the investment firm is less than EUR 100 million; 
• The total annual gross revenue from investment services and activities of the investment firm is less than EUR 30 million, calculated as an average on the basis of the annual figures from the two-year period immediately preceding the given financial year.

The investment firms falling under this class will be subject to the new IFR and IFD regime with certain exceptions.

Furthermore, the new framework introduces the concept of K-factor requirements which are quantitative indicators that reflect the risk that an investment firm may pose to its clients (RtC), market access or liquidity (RtM), and to the firm itself (RtF).  Based on these K-factors, investment firms will need to calculate their capital requirements and assess the risk group that they fall under.  Moreover, under the regulations, investment firms will need to hold an amount of liquid assets equivalent to at least one third of the fixed overhead requirement and will be required to maintain own fund minimums based on the class that the firm belongs to.  Overall, the calculations and new framework categorizations are not complicated in nature, however they do require careful consideration and precise data collection and evaluation.  We strongly urge our clients to seek assistance of our qualified accounting team that has studied and assessed the new framework requirements to ensure full compliance and accuracy. 

In terms of reporting and disclosure, in accordance with the new framework, investment firms are required to quarterly report their risk management objectives, corporate governance standards, capital resources and requirements, as well as remuneration policies and practices to the relevant regulatory authority.  Additionally, every 6 months investment firms will need to disclose information on environmental, social and governance risks, including physical and transition risks. Furthermore, information relating to the investment firm’s business activity, concentration risk, capital and liquidity requirements and the amount and composition of own funds will need to be updated on a quarterly basis for all class groups except Class 3, which will only be subject to an annual report.  It is further noted, that all Cyprus Investment Firms must annually prepare and submit audited financial statements, as well as an External Auditors Verification Report, Compliance Function Report and an annual Money Laundering ("AML") Compliance Officer Report. 

The Registration of a Cyprus Investment Firm and the obtainment of a license is a fairly straightforward procedure, provided that you have the assistance of a qualified lawyer.  In respect of general structural requirements, a CIF must have a full-fledged physical office in the Republic and must appoint at least two qualified and knowledgeable executive members and two non-executive members of the Board, the majority of which must be residents of the Republic of Cyprus.  The shareholders and beneficial owners of the company must be disclosed to the regulatory authority but will not be on public record and will be required to provide a completed questionnaire, Curriculum Vitae, criminal and non-bankruptcy certificates and possibly a statement of personal assets and liabilities at the discretion of the Cyprus Securities and Exchange Commission.  A CIF must also appoint a qualified Compliance Officer, Internal Auditor, an Anti-Money Laundering Compliance Officer and a Risk Manager, however the same person may be appointed for the position of the Compliance Officer and Risk Manager.  The CIF must also have and maintain a valid website that will contain its legal name, registration and license number, contact details, reference to being a regulated entity and a detailed description of the services offered. 

In terms of policies and procedures, a CIF must comply with various organizational requirements and implement solid corporate governance that ensures full internal compliance with the regulatory framework, the law and relevant directives, minimization of risk, conflict of client interest and continuity of services provided.  As such, Cyprus Investment Firms must set in place carefully drafted Internal Operations Manuals, Business Continuity and Anti-Money Laundering Policies as well as set procedures for complaints and external report handling.   For licensing purposes, the firm must also maintain solid administrative and accounting procedures, including proper record keeping, internal reporting as well as client identification and ownership right protection policies.  The senior management and the Board of Directors are responsible for the implementation and supervision of the above policies by relevant company employees and are in charge of ensuring that proper internal training and instruction is regularly conducted.  They must also review any written reports and internal audits on the company’s compliance functions, risk management, nonconformities and remedial measures implemented which should be discussed and recorded in an official meeting of the Board of Directors, the Minutes of which needs to be submitted to the Regulatory Authority. 

Our firm, prides itself in having extensive experience with the registration and administration of Cyprus Investment Firms and can advise clients how they can be best incorporated in their business structure.  Our corporate team can offer invaluable advice on the particularities, advantages and possible liabilities of a CIF based on your specific objectives, target market, business size and services offered.  Our lawyers can also take on the burden of policy, manual and procedure drafting, business plan preparation and compliance implementation.  We are fully qualified to undertake the corporate governance, banking and transaction handling, accounting obligations and directorship function of your investment firm that will ensure full conformity with all the requirements set by the regulatory framework.  

Please free to contact our team for a personalized consultation on Cyprus Investment firms or read more on obtaining a financial or broker license including the forex industry environment in the Republic of Cyprus here. Furthermore, If you are interested in listing your shares on the Cyprus Stock Exchange, we have prepared a detailed article on the advantages and particularities of the regulated and non-regulated markets offered in the Republic which you can find here.