Cyprus, CySEC, MiFID Investment and Ancillary ServicesSalvus Team
A Cyprus Investment Firm (CIF) is rightly considered as one of the most suitable mechanisms by those wishing to professionally offer and perform certain investment services and activities within the European Union and internationally, on certain financial instruments.
This is the first of a series of articles that will connect investment services business models to the investment and ancillary services CIFs can be licensed to provide and perform regulated by the National Competent Authority, Cyprus Securities and Exchange Commission (CySEC). A much-needed angle from which to present such information for decision making to entrepreneurs and seasoned-professionals, locally and aboard.
In this first part we will lay the foundation to clearly understand the articles to follow by showcasing why Cyprus in the first place and then clarifying the investment services and their use, followed by the ancillary services.
The case for Cyprus as a Regional or International Headquartering Centre
1. Memberships, passporting in EU and ease of establishing international branches
The Republic of Cyprus in addition to being one of the 28 member states of the European Union and one of the 19 members of the Eurozone is, also, a member of the Council of Europe, the International Monetary Fund, the United Nations, the British Commonwealth, the World Bank and the World Trade Organisation. Furthermore, the island is signatory to a large number of international conventions and treaties. This establishes Cyprus as one of the world’s most flexible international business hubs with a modern legislation.
By extension of all these memberships a CIF, through what is called passporting, can use the license granted by CySEC to offer cross-border investment services or establish a branch in another EEA jurisdiction without the need to obtain any additional licenses. Moreover, a CIF may provide investment and ancillary services in another country outside the EEA, if it is covered by its authorisation.
2. Attractive tax regime for investment firms and non-residents
Cyprus is ranking high in terms of its tax regime attractiveness and is considered a favourable jurisdiction for holding and investment services companies. A snapshot is summarised in the bullets below:
- The net profits from CIF’s activities are subject to an inviting corporation tax of 12.5%.
- Gains from the sale of titles, and, in most cases, dividends received are exempt from tax.
- There is no withholding tax for non-residents on dividend, interest and royalties paid.
- All gains of capital nature are not taxable in Cyprus – except for the 20% tax on gains on immoveable property that is in Cyprus, and on any gain from the sale of shares in companies that own immoveable property in Cyprus.
- The Republic of Cyprus has a wide network of double tax treaties agreements.
- Finally, some of the services offered by the CIF are exempt from VAT (Value Added Tax).
3. Relatively low set-up and operational costs
The costs of forming a company, the administration costs for that company and the costs of providing services and living in Cyprus are generally lower than most other member states in the European Union that have a similar profile in terms of international memberships, tax regime and legislation framework. This extends from office space to recruiting and salaries to professional services providers. Also, as outsourcing is allowed to a degree, it gives more flexibility as to the number of personnel required in Cyprus depending on the business plan and the vision. Should you want to build a team in Cyprus, the country boasts a diversified, skilful and well-educated workforce and in the past decade the workforce locally available has grown to be a multilingual community, specialising in different roles within investment firms.
The Investment & Ancillary Services under a CySEC license and the MiFID II Instruments
The Markets in Financial Instruments Directive (MiFID) is a regulation introduced to protect investors by ensuring a common and robust framework, across all EU member states. MiFID went into effect in 2007 and MiFID II followed in January 2018 to account for weakness in the previous framework provisions. It did so by harmonising the oversight among member states and broadening the scope of the regulation.
The investment services, the ancillary services and the financial instruments that are regulated, all contained within the MiFID II pages, are presented below.
The Investment Services and their use
All nine (9) investment services defined by MiFID are can be authorized under a CySEC license. All relate to the financial instruments (again defined in MiFID II) shown in the list* included at the end of this article.
- Reception and transmission of orders in relation to one or more financial instruments: beyond its very descriptive name, this investment service is – in most cases – a requirement for firms also wanting to execute orders on their clients’ behalf.
- Execution of orders on behalf of clients: an investment firm authorised for this investment service can act to conclude agreements to buy or sell financial instruments on behalf of clients.
- Dealing on own account: as per its definition it “means trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments”. Effectively the investment firm is authorised to keep the risk resulting from the trading activity in its own books.
- Portfolio management: it is the management of portfolios in accordance with the mandates given by clients.
- Investment advice: it is the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm.
- Placing of financial instruments without a firm commitment basis: an authorisation to perform this activity by an investment firm for another entity translates into the performing of a ‘sales’ function. This is because the investment firm agrees to sell the financial instruments of a third party to the public, without the investment firm committing, without having an obligation to buy any of the financial instruments that could not be sold to the public.
- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis: as opposed to the placing of financial instruments without a firm commitment basis investment service, the investment firm in this case is authorised to agrees to sell the financial instruments of a third party to the public, and commit to having the obligation to buy any of the financial instruments that could not be sold to the public.
- Operation of Multilateral Trading Facility (MTF): this is an authorisation to operate a trading system that brings together multiple 3rd party interests in buying and selling financial instruments.
- Operation of an Organised Trading Facility (OTF): this is an authorisation to operate a trading facility that is not a regulated market or an MTF.
The Ancillary Services and their meaning
All seven (7) ancillary services defined by MiFID are can be authorized under a CySEC license. All relate to the financial instruments (again defined in MiFID II) shown in the list* included at the end of this article.
- Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management and excluding maintaining securities accounts at the top tier level,
- Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction,
- Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings,
- Foreign exchange services where these are connected to the provision of investment services,
- Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments,
- Services related to underwriting,
- Investment services and activities as well as ancillary services of the type included under Section A or B of Annex 1 related to the underlying of the derivatives included under points (5), (6), (7) and (10) of Section C of MiFID II Directive where these are connected to the provision of investment or ancillary services.
*The MiFID II Financial Instruments list
There are eleven (11) categories of instruments:
- Transferable securities
- Money-market instruments
- Units in collective investment undertakings
- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash
- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event)
- Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market or/and an MTF
- Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in point 6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls
- Derivative instruments for the transfer of credit risk
- Financial contracts for differences
- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contract relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Part, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls
11. Emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/87/EC.
This was the first article, out of a series that will connect investment services business models to the investment and ancillary services CIFs can be licensed to provide and perform regulated by CySEC. We remain at your disposal if you require further information related to the licensing process of a CIF, any specific point within this article or other questions regarding topics such as capital requirements.
We will be glad to support you in finding a solution appropriate to your business plans that suits your objectives.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.