Cyprus: Insurance Business In Cyprus

Cyprus undertook a thorough review of its insurance legislation in 2002, in preparation for accession to the EU in 2004. The Law on Insurance Services and Other Related Issues of 2002 ("the Insurance Law") took effect on 1 January 2003 and has since been updated to maintain full compliance with all EU directives. The law is aimed at protecting policyholders’ interests, ensuring confidence in and stability of the insurance market and achieving market transparency.

The Insurance Law covers local insurance companies, insurance companies incorporated in another EEA (EU together with Norway, Iceland and Lichtenstein) state and third-country (non-EEA) insurance companies. The requirements are broadly similar for all, except that certain exemptions are available for companies regulated in another EEA state.

Τhe Insurance Companies Control Service (“the Service”), established under article 4 of the Insurance Law, is responsible for supervising the operations of insurance undertakings and the implementation of the Insurance Law and its associated regulations. The Service is headed by a Superintendent of Insurance, assisted by an Assistant Superintendent of Insurance, who are both public officers appointed by the Council of Ministers.

Within the framework of its responsibilities, the Service examines applications to carry out insurance business, monitors the financial position of insurance undertakings in order to establish their solvency, supervises insurance undertakings' investments in approved assets and generally establishes that insurance undertakings operate on sound insurance principles. The Service also examines applications for the registration of insurance intermediaries, including insurance agents, insurance brokers, insurance sub-agents, insurance advisors and tied-insurance advisors.

Qualification for carrying out insurance business in Cyprus

In order to carry on business in Cyprus a domestic insurance company requires a licence under articles 18 to 22 of the Insurance Law. Third country insurers are licensed under articles 25 and 26 of the Law. Insurance undertakings of another EEA state may operate in Cyprus either under the freedom of establishment or the freedom to provide services, in accordance with articles 32 to 35 and 37 of the Law.

Licences are granted for an indefinite period, subject to compliance with the requirements of the Insurance Law and the associated regulations. Separate licences must be obtained for life and non-life insurance business, and companies may not engage in non-insurance business.

Licensing requirements for domestic companies

Applications for a licence to carry on insurance business must be submitted on the prescribed form EA1, accompanied by:

  • the appropriate fee (CYP 3,000 (approximately €5,170) for general insurance; CYP 5,000 (approximately €8,620) for life insurance;
  • memorandum and articles of association certified by the Registrar of Companies;
  • initial balance sheet in the appropriate form, with confirmation by the company’s auditors of availability of the minimum guarantee fund and the share capital.
  • a three-year business plan detailing the nature of the risks, the guiding principles concerning reinsurance, the assets making up the minimum guarantee fund, details of set-up costs and projected profit and loss accounts and balance sheets, in order to demonstrate that the company has adequate resources;
  • a written declaration of the date chosen as the accounting reference date;
  • details of all directors, including academic qualifications experience, together with certificates in respect of each individual that he or she has no clean criminal record and has never been declared bankrupt;
  • similar details and certificates in respect of the internal actuary if the company is carrying on life business or sickness insurance;
  • details of all reinsurance, accompanied by confirmation by the reinsurers;
  • details of all shareholders, both direct and indirect, on form EA14;
  • written confirmation of intention to join the Motor Insurers’ Fund, if the company is to provide motor insurance.

The Superintendent of Insurance is obliged to make a decision on the application within six months of receiving it. A licence will be granted only if all the conditions set out in the Insurance Law are satisfied. For a Cyprus insurer, these are as follows:

  • the application must comply with the requirements of the Insurance Law and include all the prescribed information;
  • the applicant company must have the prescribed minimum issued share capital (CYP 400,000 for general insurance, CYP 600,000 for life and CYP 1,000,000 for reinsurance) and a minimum guarantee fund of €3,000,000 plus an inflation adjustment;
  • the business plan must show that the company is adequately resourced, both in terms of financial and human resources;
  • the Superintendent of Insurance must be satisfied that the company has adequate reinsurance provision;
  • the Superintendent of Insurance must be satisfied that the major shareholders are not inappropriate;
  • the company must have its central administration and registered office in Cyprus;
  • the company must have an adequate management structure and managers of the company must be fit and proper persons under article 59 of the Insurance Law. All executive directors and managers must be resident in Cyprus, unless the Superintendent of Insurance grants an exemption;
  • the company’s name must comply with the Insurance Law and in particular may not be similar to the name of an existing company so as to risk causing confusion;
  • the company must have an appropriate actuary for the class of business it intends to undertake;
  • if it intends to undertake motor insurance business, the company must have made arrangements to join the Motor Insurers’ Fund and to appoint a representative for settlement of claims in every EU member state.

Insurers incorporated elsewhere in the EEA

In the case of an insurer based in another EEA state intending to undertake business under the freedom of establishment or the freedom to provide services there is no need to apply to the Superintendent of Insurance for a licence to do business in Cyprus. Instead, the insurer must inform its home regulatory authority of its intention to establish an operation in Cyprus, and its home regulatory authority will in turn notify the Superintendent of Insurance.

The detailed provisions are slightly different according to whether the business will be undertaken under the freedom of establishment on the one hand, or the freedom to provide services on the other.

In the former case, the company may not start business until two months after the Superintendent of Insurance has been notified. During this period the Superintendent of Insurance may determine the conditions under which the company may operate in Cyprus.

An insurance undertaking may begin business under the freedom to provide services as soon as its home regulatory authority notifies it that it has submitted the prescribed notification to the Superintendent of Insurance. The undertaking must appoint a tax representative in accordance with article 137 of the Insurance Law and a special representative if it intends to undertake motor insurance.

Third country insurance undertakings

Insurers incorporated in third countries may operate as a branch registered under the Companies Law. Like domestic companies, they are required to submit an application to the Superintendent of Insurance, who will issue a licence subject to the following requirements being satisfied:

  • the company must be authorised in its home market to carry out business of the class it intends to undertake in Cyprus;
  • the company must appoint a general representative in Cyprus who the Superintendent of Insurance accepts as being "fit and proper" supported by an appropriate management;
  • the company must have an issued and paid up capital in its home country equal to at least the amount required for an insurance company incorporated in Cyprus (see above);
  • the company must have assets in Cyprus equal to at least half of the minimum guarantee fund required of local companies, and must have deposited at least one-quarter of the fund in Cyprus as a guarantee;
  • it must have submitted a three-year business plan including detailed financial projections that demonstrates that it has adequate financial and other resources;
  • the company must appoint an appropriately qualified actuary according to the class of business it intends to undertake;
  • if it intends to offer motor insurance, the company must have claims settlement representatives in all EU member states;
  • the company must give appropriate undertakings regarding:
    • observance of sound insurance principles;
    • maintenance of solvency margins;
    • maintenance of accounting and other records;
    • establishment of technical reserves;
    • membership of the Motor Insurers’ Fund, if it engages in motor insurance.

Monitoring requirements

The Superintendent of Insurance is responsible, inter alia, for monitoring domestic and third country insurance companies operating in Cyprus in order to confirm that they are operating in accordance with the Insurance Law and are able to meet their obligations to policyholders.

Domestic and foreign insurance companies must maintain adequate levels of approved investments to cover their technical reserves, with the exception of life business unit-linked policies, in line with the approved percentages and free of any burden, and these must be expressed or liquidated in the appropriate currency according to the currency matching rules set out in the Insurance Law. For technical reserves concerning unit-linked life policies, up to five per cent of the shares of the insurer’s parent company may be acquired as long as this is within the limits set from time to time by ministerial order for these investments.

Domestic companies must submit a return of approved investments to the Superintendent of Insurance within four weeks after the end of each quarter. The return must be in the prescribed format, signed by the managing director and one other director, or, if there is no managing director, by a director and the general manager. The returns for the second and fourth quarters of each financial year must be audited and signed by the auditors.

Foreign companies are allowed five weeks after the end of the quarter to submit their returns, which must be signed by the general representative in Cyprus and by a director. The returns for the second and fourth quarters of each financial year must be audited and signed by the auditors.

An annual return must be submitted within six months of the companies financial year end. The annual return includes detailed analyses in the prescribed form of assets, liabilities, income and expenses and must be certified by the company’s directors and actuary and accompanied by the auditors’ report.

New companies are subject to increased reporting requirements for the first three years of operations, during which they are required to submit additional information to the Superintendent of Insurance for the purpose of monitoring against the business plan submitted with the application for a licence.

Taxation of insurance companies

Companies that are resident in Cyprus for tax purposes are subject to tax in Cyprus. Residence is determined by the locus of management and control. The income tax rate is ten per cent, the lowest in the EU. Furthermore, the Income Tax Law provides the following important benefits:

  • profits on disposals of securities (defined as "shares, bonds, founders’ shares and other titles of companies or legal persons and rights thereon") are exempt from tax;
  • dividends received by one Cyprus resident company from another are exempt from all forms of tax;
  • if a Cyprus resident company owns 1% or more of the share capital of a foreign corporation any dividends it receives are also exempt from tax, except in the event that:
    • directly or indirectly more than 50% of the activities of the paying company result in investment income; and
    • the paying company is subject to tax at a rate substantially lower than the Cyprus rate;
    • dividends and interest may be paid to non-residents without deduction of any withholding tax.

Calculation of taxable profits

General insurance business

For general insurance business, taxable profits are calculated by adding together all the gross premiums, interest, commissions, and other income and deducting any premiums returned to the insured and premiums paid on reinsurance as well as other expenses including commissions. The reserve for unexpired risks at the end of the year of assessment is deducted from the resulting figure, and the reserve similarly calculated for unexpired risks at the beginning of the year of assessment is added back, in order to arrive at the final taxable profit. Cyprus branches of foreign insurance companies are also allowed to deduct head office expenses up to a limit of 3% of net premium income (premiums received, less premiums paid for reinsurance).

Losses may be set off against income from other sources for the same year of assessment, or to the extent to which they are not set off, be carried forward and set off against the income of the undertaking for subsequent years.

Life insurance business

For life insurance business, taxable profits are calculated by adding together all gross premiums and net investment income and deducting any reinsurance premiums paid, net claims, surrenders, and expenses including commissions. From the resulting figure, the reserve for liabilities in respect of the long term business in Cyprus at the end of the year of assessment is deducted, and the reserve for liabilities at the start of the year of assessment is added. Cyprus branches of foreign insurance companies are also allowed to deduct head office expenses up to a limit of 2% of net premium income (premiums received, less premiums paid for reinsurance).

Where no tax is due, or the tax payable is less than 1½% of the gross premiums, excluding contributions to any approved pension or provident fund or any other fund which the insurance undertaking manages for the benefit of its members, the undertaking must pay the shortfall by way of income tax pre-payment. Income of the undertaking from other sources includes income from the management of any pension, provident, or other fund.

Losses may be set off against income from other sources for the same year of assessment, or to the extent to which they are not set off, be carried forward and set off against the income of the undertaking for subsequent years.

Value added tax

Insurance is exempt from VAT and companies will not be able to recover VAT paid.

Stamp duty tax

Stamp duty tax amounts to CYP 1 or less on general insurance contracts and up to CYP 10 on life contracts, and is generally recovered from the customer by way of policy charge.

Other levies

Though not a tax as such, companies providing motor insurance are required to contribute 5% of the relevant gross premiums to the Motor Insurers’ Fund.

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.

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