1. Introduction

The authorization and operation of an investment firm in Cyprus is regulated under the Investment Services and Activities and Regulated Markets Law of 2017 as amended (“Law”).

The Law applies to investment firms, market operators and third-country firms providing investment services or performing investment activities through the establishment of a branch in the Republic of Cyprus.

The Law constitutes the national transposition of the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (“MIFID II”).

  1. What is a CIF

According to the Law a Cyprus investment firm (“CIF”) is a legal person established in Cyprus and which is regulated by the Cyprus Securities and Exchange Commission (“CYSEC”) in order to provide of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis.

Investment services or investment activities include:

  1. Reception and transmission of orders in relation to one or more financial instruments;
  2. Execution of orders on behalf of clients;
  3. Dealing on own account;
  4. Portfolio management;
  5. Investment advice;
  6. Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;
  7. Placing of financial instruments without a firm commitment basis;
  8. Operation of a multilateral trading facility (“MTF”);
  9. Operation of an organised trading facility (“OTF”).

Further to the above, a CIF may provide ancillary services, inter alia, safekeeping and administration of financial instruments for the account of clients, granting credits or loans to an investor for transaction purposes, foreign exchange services, services related to underwriting et al., noting however, that it is not possible for a CIF to be authorised for the provision of ancillary services only.

  1. Establishing a CIF

First of all, a Cyprus company must be established pursuant to the Companies Law, Cap.113.

Following that, the provision of investment services and/or the performance of investment activities as a regular occupation or business in Cyprus is subject to prior authorisation by CYSEC.

It is possible for a CIF to amend its CIF authorisation to include additional investment services or investment activities or ancillary services by submitting a relevant request to CYSEC.

3.1 Initial Capital Requirements

Depending on the investment services and/or investment activities that a CIF intends to offer, there are different initial capital requirements in order for CYSEC to grant a CIF authorization.

a. For a CIF engaged in dealing on own account and with underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis, the initial capital requirement is EURO 750.000.

b. For a CIF engaged in reception and transmission of orders in relation to one or more financial instruments, execution of orders on behalf of clients, portofolio management, provision of investment advice and placing of financial instruments without a firm commitment basis and which shall not be allowed to hold money or titles owned by its clients, the initial capital requirement is EURO 75.000.

c. For a CIF engaged in operation of an OTF when such CIF shall perform or be allowed to perform transactions for owned account, the initial capital requirement is EURO 750.000.

d. For a CIF engaged in operation of an MTF, the initial capital requirement is EURO 150.000.

3.2Management Body

An essential aspect of establishing a CIF is the composition of its Management Body, to this end, a List of Members of the Management Body must accompany the application, along with a Personal Questionnaire of the members of the Management Body.

According to the Law, the primary obligation to ensure that the members of the board of directors of a CIF shall at all times be of good repute and possess sufficient knowledge, skills and experience to perform their duties lies on the CIF, noting however, that CYSEC has the authority to withdraw a member who does not meet the requirements of the Law.

The board of directors is responsible for defining, overseeing and implementing of the governance arrangements that ensure effective and prudent management of a CIF. In order to achieve the above, all members of the board of directors shall commit sufficient time to perform their duties in the CIF and generally, the board of directors shall hold adequate knowledge, skills and experience to be able to understand the CIF’s activities, including the principal risks, while, its overall composition captures a sufficiently wide range of experiences.

Each member of the board of directors shall act with honesty, integrity and independence of mind to effectively assess and challenge the decisions of the senior management where necessary and to effectively oversee and monitor the decision-making of the management.

It is provided, in the Law, that CYSEC shall refuse a CIF authorisation if it is not satisfied that the members of board of directors of the applicant are of sufficiently good repute, possess sufficient knowledge, skills and experience and commit sufficient time to perform their duties in the applicant, or if there are objective and demonstrable grounds for believing that the board of directors of the applicant may pose a threat to its effective, sound and prudent management and to the adequate consideration of the interest of its clients and the integrity of the market.

It is a requirement of the Law, that at least two persons must effectively direct the business of the applicant.  

 

3.3 Shareholders of a CIF

The identities of shareholders or members with qualifying holdings must be disclosed, along with the amounts of those holdings. Further, the applicant’s shareholder must complete the relevant Questionnaire which shall be submitted along with the application.

CYSEC shall refuse to grant an authorisation if, taking into account the need to ensure the sound and prudent management of a CIF, it is not satisfied as to the suitability of the shareholders or members that have qualifying holdings.

Qualifying holdings in a CIF can be acquired, increased or disposed of, following a prescribed procedure.

3.4 Other requirements in order to establish a CIF

Additional requirements for the establishment of a CIF includes, inter alia, the following:

  • The CIF’s head office must be situated in the Republic.
  • The applicant must provide a programme of operations setting out, inter alia, the types of business proposed and the organisational structure, all of which is necessary so as to enable CYSEC to satisfy itself that the applicant has established, at the time of granting of CIF authorisation, all the necessary arrangements to meet its obligations.
  • The applicant must provide a Business Plan.
  • The CIF must be a member of an authorised investor compensation scheme.
  • The CIF must comply with certain organisational requirements regarding, inter alia, its compliance with its obligations under the Law, the prevention of conflicts of interest, the reviewing of the manufactured or offered financial instruments.

Additional supporting documentation must be provided upon apply for a CIF authorisation.

3.5 Withdrawal of a CIF’s authorization

CYSEC may withdraw a CIF’s authorisation where a CIF, inter alia, has obtained the authorisation through false statements or any other irregular means or if it does not make use of the authorisation within 12 months, expressly renounces the authorisation or has provided no investment services or has performed no investment activity for the preceding six months.

  1. Timeframe

As per the Law, CYSEC informs the applicant within six months of the submission of a complete application, whether or not authorisation has been granted. The timeframe may extend if additional information is required due to an incomplete application.

  1. Benefits of establishing a CIF

The authorisation of an investment firm in Cyprus is valid for the entire European Union, allowing such CIF to provide the services or perform the activities for which it has been authorised, throughout the European Union, either through the right of establishment, including through a branch, or through the freedom to provide services.

Compared to other jurisdictions, setting up an investment firm in Cyprus can be relatively cost-effective in terms of initial capital requirements, regulatory fees, and operational expenses.

Moreover, Cyprus offers a favorable tax environment for businesses, including CIFs. The country has a competitive corporate tax rate, tax exemptions on certain types of income, and a network of double taxation treaties with numerous countries. Establishing an investment firm in Cyprus can lead to tax optimization and cost savings for the firm.

For further information or advice contact our team at info@papakyriacoulaw.com