Cyprus: Business And Investment Opportunities in Cyprus - 12. International Banking Units (IBUs)

Last Updated: 10 December 1999

The island is emerging as an international banking centre. A substantial number of foreign banks have been granted licences to set up international banking units and conduct international banking activities from the island.

It is the stated policy of the Central Bank of Cyprus to encourage the establishment of IBUs (preferably branches, as opposed to locally incorporated subsidiaries or associated companies) and the authorities are determined to attract reputable banks with an established track record of growth and profitable operation to participate in international banking activities on the island. The Government has shown that it is willing to interpret existing legislation as liberally as possible and even to introduce new legislation where necessary in order to enable IBUs to operate effectively while still adhering to sound banking principles.

12.1 IBUs establishing businesses in Cyprus must comply with the following provisions:

12.1.1 IBUs, whether branches of foreign banks or locally incorporated legal entities, must be licensed under the provisions of the Banking Law, 1997 (66(1)/97).

12.1.2 As a rule, only branches or subsidiaries of banks enjoying a good reputation internationally, and established in countries where there are adequate banking supervision and lenders of last resort facilities, will be considered as eligible for a licence.

12.1.3 Where an IBU is a subsidiary of a foreign bank, the parent bank is expected to provide an appropriate letter of comfort.

12.1.4 They are expected to operate as fully staffed units and not merely as "brass-plate" operations.

12.1.5 Except with special permission from the Central Bank, IBUs must operate wholly on an international basis and all their dealings must be with non-residents and denominated in currencies other than the Cyprus pound.

12.1.6 All IBUs are exempt from most of the monetary policy and credit regulations applicable to local banks, such as the minimum reserve requirement, adherence to maximum interest rates, restrictions on the holding of foreign assets or investments in shares and immovable property. Ratios such as liquidity and capital to risk assets are applicable only to locally incorporated IBUs, but all IBUs are required to supply to the Central Bank such information about their activities as might be requested, to satisfy the Central Bank of their ability to meet their obligations as they fall due and of their adherence generally to sound banking practices.

12.1.7 IBUs must pay an annual fee of US$15,000 to the Central Bank as reimbursement to the latter of the cost of its supervisory function.

12.1.8IBUs must submit to the Central Bank a ‘Letter of Authorization’ which enables the latter to exchange information with the applicant bank’s home banking supervisory authorities.

12.2 Administered Banking Units (ABUs)

Applicant banks which meet the Central Bank’s eligibility rules may also be allowed to establish themselves as Administered Banking Units. ABUs are required to carry on banking business in their own name, but their day-to-day administration should be carried out, on their behalf, by another bank (the "administering bank"), which must be already licensed by the Central Bank to operate in or from within Cyprus. They must submit to the Central Bank a "Letter of Authorization" in the same way as IBUs.

ABUs must enter into a written management agreement with an administering bank.

They must pay an annual fee of US$10,000 to the Central Bank.

12.3 Taxation

If an IBU takes the form of a local branch of a foreign bank with management and control exercised outside Cyprus, no Cyprus tax will be payable; if management and control is exercised in Cyprus then tax is payable at a reduced rate of 4.25%. If the IBU takes the form of a Cyprus incorporated subsidiary of a foreign bank, then it is liable to the reduced rate of 4.25% on its net income as are all other international business companies. From a tax planning point of view, IBUs may be of interest to financial companies in countries which either do not tax at all, or tax in full, active income (and banking is considered to be such an income) emanating from foreign branches. A Cyprus IBU may engage in financing joint venture activities in countries with which Cyprus has entered into a double taxation agreement. This would result in significant tax savings as the interest article of the relevant treaty would serve to eliminate or reduce the withholding tax on outgoing interest payments. Assuming that the IBU can claim the benefit of such double taxation treaties, the net result would be that tax exposure is minimised or eliminated.

12.4 Other Advantages

All other benefits available to international business entities in Cyprus, such as duty-free concessions and exchange control exemption, also apply to IBUs and their expatriate employees.

In addition, the following advantages arising inter alia out of Cyprus' geographical position might be particularly useful to IBUs:-

12.4.1 the possibility of attracting international businesses relating to or connected with neighbouring Middle Eastern and other countries;

12.4.2. the possibility of servicing the transit trade now using the Cyprus ports en route to the Middle East and Africa;

12.4.3. the possibility of specialising in shipping and aviation finance;

12.4.4 the possibility of attracting business from the thriving international community on the island and expatriates as well as from international companies which maintain their international or regional headquarters in Cyprus;

12.4.5. the possibility of providing finance and related financial services such as leasing, asset finance, project finance, etc, to neighbouring countries, CIS, China and India with whom Cyprus has concluded double taxation treaties;

12.4.6 the possibility of playing a role in the reconstruction of Lebanon and Palestine.

The purpose of this publication is to assist clients and associates in clarifying and appreciating the range of opportunities which are available in or through Cyprus. Although every effort has been made to provide the reader with a clear and comprehensive picture of the island's beneficial regime, it should be appreciated that is not possible to cover all aspects comprehensively in a publication of this size.

Individuals or companies who are seriously considering using Cyprus for any of their international business activities are advised to obtain expert professional advice before taking positive action.

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