Cyprus: The Developing International Financial Centre

Last Updated: 20 November 2000

In view of its strategic location, situated in the eastern part of the Mediterranean sea at the crossroads of Europe, Asia and Africa, Cyprus has since ancient times been regarded as an important international business centre.

In addition, its past historical connection with the United Kingdom has given it the advantages of English based legal, accounting and banking systems, which have contributed to the development of the infrastructure necessary for Cyprus's growth as a financial centre. Cyprus law closely follows English law and nearly all the major international accounting firms are represented on the island. The local law firms are of a very high calibre, many of them specialising in international trusts, international tax planning and finance.

It was the combination of the above environment with the advantageous tax policies, introduced in 1975 – tax on profits from international business operations ranging from 0% to 4,25% - that triggered off the rapid evolution of Cyprus as an international business and financial centre.

As a result of Cyprus's success in becoming one of the world's primary international business centres for trading, investment and shipping activities, more than 44.800 international business companies and about 2.670 ships are currently registered in Cyprus. The development of the banking and financial services industry was therefore a natural consequence.

In this respect, Cyprus offers not only impeccable professional, technological services and ample skilled human resources to cater for international financial needs, but also an agreeable living environment combined with its people's welcoming attitude.

International Banking

Cyprus has attracted a substantial number of international banks, its 34 International Banking Units (IBUs) / Administered Banking Units (ABUs) and 3 Representative Offices of foreign banks come from a variety of countries including: Bulgaria, Cayman Islands, France, Germany, Greece, Jordan, Lebanon, Luxembourg, Romania, Russia, Ukraine, Switzerland, the UK and the USA.

Applications for the establishment of an IBU / ABU in Cyprus may only be submitted by foreign incorporated banks enjoying a good reputation internationally and which have an established track record of growth and profitability. Out of a total of 34 IBUs / ABUs, only 9 are locally incorporated the rest being branches of established foreign banks.

An applicant bank must originate in a country which exercises strict banking supervision. The Central Bank of Cyprus, always obtains the written consent of an applicant bank's home licensing and / or banking supervisory authority as well as its undertaking that it will exercise consolidated supervision over the global activities of the applicant bank, including the operations to be carried out from within Cyprus.

The Central Bank supervises IBUs / ABUs by both on-site inspections and by monitoring through the various prudential periodic returns which are submitted to it by IBUs / ABUs. The main purpose of the supervisory framework is to ascertain whether IBUs / ABUs abide by the conditions attached to their banking business licence and to verify that prudent banking policies are followed.

Cyprus is a tax incentive orientated country, but not a tax haven, and offers benefits aimed at foreign individuals and enterprises who wish to conduct their affairs in confidentiality, from within the island. Having stated the above, it must be emphasised that Cyprus is not prepared to tolerate criminal activity. In this regard, it should be noted that Cyprus has signed and ratified the "1988 U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention)" and the "1990 Council of Europe Convention on Laundering, Seizure and Confiscation of the Proceeds from Crime" on the basis of which the Cyprus House of Representatives has enacted the Prevention and Suppression of Money Laundering Activities Law of 1996. Under this law, a person is obliged to disclose to the Unit for Combating Money Laundering a suspicion or belief that any funds or investments are derived from or used in connection with all forms of serious criminal activity.

International Financial Services Companies

In the last ten years, there has also been a substantial growth in International Financial Services Companies ("IFC"s) which have established a presence in Cyprus. These IFCs originate from a variety of countries and offer a wide spectrum of financial services to the public, ranging from investment advice to the management of investment portfolios and the establishment and operation of collective investment schemes. The current number of IFCs offering financial services from within Cyprus is 113.

A person, whether natural or legal, submitting an application to the Central Bank for the establishment of an IFC, must be "a fit and proper" person before being allowed to be involved in the provision of financial services. An application for the establishment of an IFC is subject to a detailed vetting procedure and in this respect the applicants are required to complete specifically designed questionnaires, including details of their academic and professional qualifications as well as previous employment history.

The Central Bank, for instance, obtains a "Letter of Authorisation" from an applicant which enables it to exchange information with overseas regulatory authorities and to seek directly from other independent sources positive evidence of the good standing and experience of the applicant(s). It must also be emphasised that an applicant, in order to be successful, must be able to arrange for "Letters of Comfort", to be provided to the Central Bank, by overseas regulated financial services firm, with which the IFC will have a legal or other close business association.

International Collective Investment Schemes (Mutual Funds)

In May 1999, an important piece of legislation, the International Collective Investment Schemes Law (the Law) came into force which enables the establishment of four different structures of International Collective Investment Schemes ("ICIS").

An ICIS, under the Law, may be structured as follows:

  • Fixed capital investment company; or
  • Variable capital investment company; or
  • Unit trust scheme; or
  • Investment limited partnership.

Fixed capital investment companies are closed-end structures whereas the other three can either be open-ended or closed-ended, depending on the needs of the promoters and investors concerned.

Upon application to the Central Bank and having regard to the investment policy and the particular investment objectives as well as the type of investors to be targeted, the applicant may be recognised as an ICIS and may be designated as:

  • ICIS marketed to the general public; or
  • ICIS marketed to experienced investors; or
  • Private ICIS.

The stringency of regulation is highest for ICIS marketed to the general public and lowest for private ICISs, which are required to limit the number of investors to no more than 100. Cyprus, therefore, offers a variety of legal structures to select from, coupled with flexibility as to the degree of regulation desired.

The principle advantages of organising an ICIS as a company are simplicity and familiarity. Other advantages may include certain tax advantages for investors in certain jurisdictions. A company is generally easier to organise and administer than a limited partnership or trust. A limited partnership is somewhat more complicated to establish and maintain , and perhaps more difficult to market to investors in some jurisdictions. A limited partnership may be preferred by some types of funds such as venture capital funds, and therefore this structure may be more suitable for institutional investors rather than for the general public. Unit trusts are usually more common in the Anglo-Saxon world. Unit trusts under the Cyprus law, offer similar advantages as companies. In other jurisdictions such structures may be preferred by promoters because they offer the additional advantages from a marketing perspective, of having a trustee responsible for safekeeping the Fund's assets and generally safeguarding the interests of investors. In Cyprus, however, the requirement to appoint a trustee also applies to companies and partnerships as much as it applies to unit trusts.

There are jurisdictions where the legislation does not include the closed-end company structure under the definition of a collective investment scheme. In our view, form the aspect of investor protection it is undesirable for such structures to remain unregulated. In Cyprus a promoter may organise an ICIS in the form of a company, either as an open-ended or as a closed -end structure.

Open-ended funds which are also known as mutual funds in other parts of the world, may sell and repurchase, or redeem their own units on a continuous basis, at a price closely related to their net asset value per unit. Closed-end funds generally issue units only once at the beginning of their life and do not redeem their own units. Since investors cannot rely on repurchase or redemption to regain liquidity, closed-end funds are typically expected to either be structured with a limited life, after which the fund will be dissolved and its assets liquidated, or be listed and traded on a Stock Exchange, through which investors can sell their units.

In this respect suitable amendments have been effected to the Cyprus Companies law to enable open-ended companies to purchase and/or redeem their own shares as well as to enable both open-ended and closed-end companies to have a limited duration and to be dissolved without having to call a general meeting of unitholders.

The Central Bank of Cyprus has been designated under the Law as the competent authority responsible for the recognition, regulation and supervision of ICIS, their managers and trustees.

The same entry criteria and regulatory requirements are applicable to all four legal structures of ICIS. In this respect, in order to grant a recognition, the Central Bank of Cyprus must be satisfied about the competence and probity of the proposed ICIS's promoters, manager and trustee.

The Central Bank of Cyprus has broad powers under the Law to protect the interests of investors.

All ICIS, unless specifically exempted by the Central Bank of Cyprus or unless designated as a Private ICIS, must appoint a manager and a trustee, who must both be approved by the Central Bank of Cyprus.

A trustee of an ICIS, must either be: a bank licensed to carry on business in or from within Cyprus or in a country which in the opinion of the Central Bank of Cyprus exercises adequate banking supervision in its jurisdiction, or (b) a trustee which provides trustee services to the public at large in or form within Cyprus and which is adequately supervised or (c) a company incorporated in Cyprus which is a subsidiary of either a bank or a professional trustee company.

The manager and the trustee must be independent of one another and must have a place of business in Cyprus, from where to conduct their business, unless such requirement is specifically waived by the Central Bank of Cyprus.

Private ICIS, although exempt from the requirement to appoint a manager or trustee, must nevertheless appoint a custodian and an administrator, which must be based in Cyprus.

It must also be noted that ICIS of the open-ended variety i.e. international variable capital companies and unit trust schemes which have been designated as Investment Schemes marketed to the general public can be listed on the Cyprus Stock Exchange by simply filing documentation already submitted to the Central Bank for securing their recognition and designation under the Law. ICIS listed on the Cyprus Stock Exchange are specifically exempted form any other obligations imposed upon listed companies by the provisions of the Cyprus Stock Exchange Law and by regulations issued under it. Shares or Units of ICIS listed on the Cyprus Stock Exchange can also be bought and sold on a private basis over the counter without an obligation to declare such transactions to the Cyprus Stock Exchange. The Central Bank of Cyprus retains full regulatory responsibility over the operations of listed ICIS, their Managers and Trustees.


In July, 1992, Cyprus brought in a new international trusts legislation. This is an excellent piece of legislation which has enhanced further the reputation of Cyprus as an international financial centre, creating the infrastructure for Cyprus to emerge as a major trust jurisdiction. The availability of the 31 tax treaties between Cyprus and other countries, together with the complete exemption from taxation of the income and profits of international trusts, can provide the international tax planner with a valuable tool for minimising the tax burden of a trust and its beneficiaries.

Confidentiality is the cornerstone of the International Trusts Law of Cyprus, which ensures that the trustee of any other person, including officers of the Government and the Central Bank, may not disclose to any person any information or documents. In addition, the Cyprus International Trusts Law offers effective asset protection by making it difficult for third parties to invalidate the trust, even in the event of a settlor's bankruptcy, unless clearly fraudulent intention was behind the creation of the trust.

Good quality corporate trustee services are available in Cyprus from the trustee departments of banks, accountants and law firms as well as from international trustee services companies, which undergo the same vetting procedure as the one described for the establishment of IFCs above, prior to being permitted by the Central Bank to establish a presence on the island.

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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