Cyprus’ re-emergence as a Mediterranean business champion has been marked by a rapidly diversifying financial services sector. Moving well beyond banking and corporate formation, the island is today positioning itself as a home for investment fund managers, crowdfunding platforms and fintech entrepreneurs.
Cyprus is forging a reputation as a quality-efficient and cost-competitive choice for regional and global financial services firms and is gaining ground as a management hub in selected segments. With a strong track record in cross-border finance and investment, Cyprus’ financial services sector has significantly expanded in recent years. The island has worked hard to regain the investor trust which was damaged during its 2013 banking crisis. Regulatory reform, coupled with economic restructuring and the identification of new growth drivers, has radically transformed Cyprus’ financial market.
Today, the country delivers world-class fund management and trust administration services in line with international best practices. From a regulatory point of view, the country has pioneered the foreign exchange sector and is positioning itself as a major player in the wealth management industry. Besides its longstanding ties with Russia and CIS countries, investment into Cyprus is increasingly coming from other regions of the world, including Asia, the Middle East and Africa, a trend that is expected to accelerate further in the coming years.
Meanwhile, the island is developing new areas of opportunity. Fintech and digital finance are fast developing into thriving segments of the finance sector, while Cyprus has brought in a new crowdfunding law in order to position itself as an ideal EU jurisdiction in which crowdfunding platforms can be established.
Just six years ago, Cyprus’ financial sector was on the brink of collapse as a result of the European debt and banking crisis. The country experienced financial difficulties following the breakdown of the Greek economy, where Cypriot banks had huge investments. Cyprus became the fifth country after Greece, Ireland, Portugal and Spain to turn to the eurozone for financial help during the region’s debt crisis and was eventually bailed out to the tune of €10 billon by the European Commission, the European Central Bank and the International Monetary Fund.
One condition of the bailout was a reform of Cyprus’ financial system, which in combination with other measures such as creating solid investment opportunities that attract foreign interest, led to a strong economic recovery in the years that followed. For many years, the sector focused on banking and corporate structing, particularly facilitating investments into Europe, the Middle East and Africa, as well as Russia and Eastern Europe due to a fiscally attractive tax regime and wide network of tax treaties. However, in the aftermath of the island’s debt crisis, Cyprus sought new economic drivers and placed greater emphasis on diversifying its financial industry by adding sectors such as investment funds, fintech and investment migration to its portfolio.
Cyprus’ financial services sector has grown significantly since its early days and has been growing at a commendable rate of 6.5% per annum. In 2019, financial activities and professional services contributed 7.6% and 8.2% respectively to Gross Value Added (GVA). The Cyprus Securities and Exchange Commission (CySEC), the country’s financial services regulator, supervises more than 760 entities which employ together close to 20,000 people. Activities today centre around three strategic areas: corporate services, financial services and fintech/digital finance.
Foreign businesses have long been attracted to Cyprus due to its cost-effective services and preferential access to high-growth markets. Corporate services and corporate structuring continue to play an important role. Investment funds, trust services and private wealth are today growing elements of the island’s financial sector, and all have potential for further expansion. Facilitating the next steps in the finance sector’s evolution, Cyprus has established an innovation hub that provides a safe space for fintech entrepreneurs who are developing the business models of the future. These initiatives show that Cyprus today has a well-rounded financial services sector that developed a diverse portfolio of services and bears little resemblance to the industry of just a few years ago.
Based in Cyprus
Cyprus is today home to a unique blend of financial services firms. Key players in the banking scene are Bank of Cyprus, Hellenic Bank and RCB Bank. However, in addition, many foreign banks, which carry out international banking business, have a presence on the island. Cyprus’ booming fund sector has attracted a host of fund management companies, including Citigrade Capital, Hanseatic Capital Management, GMM and many more. Fund platforms such as KMG Capital Markets and Fortified Capital operate as third-party providers, while an array of fund administrators such as Alter Domus, IQ-EQ and Vistra complement the sector.
Foreign exchange trading is probably one of the most active segments in Cyprus’ financial industry. CySEC issued its first forex brokerage licence to Windsor Brokers in 1988, but with the emergence of online retail trading interest in setting up in Cyprus intensified significantly. Today, some 40 forex firms are based on the island, including companies such as FXPro, OctaFX, FXTM and BDSwiss. The professional services segment is headed by the ‘Big Four’ as well as a range of top-tier legal, accounting and corporate services providers with plenty of international expertise.
Regional Business and Management Hub
Corporate formation remains one of Cyprus’ areas of specialisation. Blue-chip corporations and corporate planners continue to establish holding, trading and investment companies on the island to channel investments into key markets worldwide. Cyprus’ stable EU environment and neutral political stance, coupled with its low corporate tax rate at 12.5% and tax treaties with 65 countries, have made the island a prime destination for the structuring of investments into Europe, the Middle East and Africa, as well as Russia and Eastern Europe.
More recently, Cyprus has also begun posting growth as a regional and international headquartering location. Over the last five to 10 years, the island’s advantages as a business hub became ever more ingrained, with many multinationals basing operational or corporate management functions on the island. Companies such as NCR, Kardex, Amdocs, Bernhard Schulte Shipmanagement and Wargaming have all established headquarters on the island.
Strong Banking and Insurance
Cyprus’ banking sector is a symbol of the island’s reform process following the 2013 crisis. The industry was forced to restructure and consolidate; and today the country has a much stronger national banking sector than a few years ago. Cypriot banks enjoy strong capital ratios, and the rate of non-performing loans has been reduced by half. International banks continue to use the island as a launch pad into high-growth and emerging markets. More than 30 foreign banks are operating in Cyprus, which mainly carry out international banking business and have limited interaction with the domestic economy.
Cyprus’ insurance sector is performing well; posting premium growth year-on-year. However, insurance in Cyprus focuses mostly on domestic business. While the island is home to 30 insurance companies, only a small number of them are writing business outside of Cyprus and taking advantage of EU passporting rights. Industry experts are of the opinion that this segment of the financial sector could be developed further, highlighting that Cyprus is particularly well positioned as a base for companies wishing to do business in the EU and the Middle East region.
A European Contender in Funds
Cyprus’ investment funds sector has surprised the global asset management community with its fast growth. A sector that was nearly non-existent a few years ago, Cyprus catapulted itself into recognition by overhauling and modernising the sector’s regulatory framework. Assets under Management (AuM) have increased by 200% from €2.7 billion in 2016 to €8.3 billion in 2019, demonstrating that Cyprus is able to compete with Europe’s longer established fund domiciles. Cyprus offers both EU-regulated Undertakings of Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), and has become a firm favourite of fund management companies and fund platforms.
Cyprus has experienced growing interest from fund professionals around the world, but most notably from Europe, as well as Asia and the Middle East, whose fund managers are increasingly seeking access to the EU market. The island is positioning itself as a cost-effective alternative to the larger European fund centres, Luxembourg and Ireland, and many in Cyprus believe the sector has a great future ahead, estimating that AuM could reach €12 billion in the next five years.
Private Wealth Hub
Cyprus is also rising to the fore as a wealth management and family office destination. There is little doubt that Cyprus’ wealth management sector benefited from the island’s longstanding and close relationship with Russia and other Eastern European countries. For decades, Cyprus has been a financial base for ultra-high-net-worth and high-net-worth individuals from those countries, but it is also increasingly on the radar of wealthy individuals from the Middle East and Asia. With an extensive banking network and the availability of a variety of investment vehicles, a growing fund industry as well as no taxation on capital gains or succession, Cyprus is a natural hub for wealth management firms and family offices.
Another key reason for Cyprus’ appeal as a private wealth hub is the island’s modern trust regime, which is a unique combination of English and Cypriot law, and hence renders the island’s trust legislation very unique. A Cyprus Trust can be used in a range of international structures because it is flexible enough to accommodate the objectives of the most demanding client. The income of an international trust is tax exempt as long as it is earned outside of Cyprus.
On the back of a comprehensive package of wealth management solutions, the island’s wealth and asset managers are optimistic that they will be able to maintain their robust growth in client numbers and assets in the years ahead.
For more than 20 years, Cyprus has been the jurisdiction of choice for Foreign Exchange (Forex) and Contracts for Difference (CFD) brokers, and the country hosts a thriving industry and headquarters for many global giants in the field. Cyprus became popular due to low corporate tax rates, excellent infrastructure and an efficient regulatory framework under the supervision of CySEC, which is fully aligned with EU directives and European MiFID regulations. Cyprus was the first country in the EU to regulate the foreign exchange market, and CySEC is credited with attracting foreign companies to set up Cyprus Investment Firms (CIFs). With years of expertise and advanced infrastructure in electronic platforms, Cyprus offers strategic advantages that have positioned it among the most attractive destinations for international forex business.
Fintech & Crowdfunding Driving Growth
The future of finance will be very much determined by financial technology. Cyprus’ Innovation Hub has attracted start-ups and entrepreneurs working on tools that are utilising technologies such as Internet of Things (IoT), Artificial Intelligence (AI), blockchain and cloud computing for fintech and regtech purposes. Other projects are involving big data and crypto assets. While the ‘Hub’ only reviews and provides non-binding feedback to the companies operating under its umbrella, the initiative indicates Cyprus’ ambition to become a key player in the digital finance field. In fact, Cyprus’ innovation agenda is wide-ranging, covering everything from tax incentives for fintech firms, a Startup Visa Scheme to attract and retain tech talent and the establishment of a €20 million fund with an emphasis on start-ups and innovative companies. The island is also assessing whether it needs to change existing legislation to account for the use of new technologies.
Cyprus has also set out to attract crowdfunding service providers and platforms. Crowdfunding is increasingly seen as an alternative form of finance for small and medium-sized enterprises and start-ups which often find it difficult to access bank finance. There are plans for an EU-wide regulatory regime, which has yet to be realised. Similar to its decision to be a first-mover in regulating forex firms, in 2020, Cyprus introduced national rules for investment-based crowdfunding, which allow investment firms to offer crowdfunding services under their existing licence without compromising investor protection. The expectation is that Cyprus’ initiative will be met with significant interest from crowdfunding service providers wanting a head start in the European market.
There are several compelling features about Cyprus as a business hub and service centre. The island is part of the EU, the eurozone and the Commonwealth and is strategically positioned between three continents – Europe, Africa and Asia – with regular flight connections, multicultural business etiquette and a stable political regime. It has an efficient and transparent tax system and its legal system is based on English common law.
CySEC, the regulator for all financial services, has overhauled and improved many facets of its operations in recent years to ensure the smooth and safe operation of Cyprus’ financial sector. CySEC emphasises that financial crime has no place in Cyprus and that the island’s services sector and its business models have changed in recent years. Cyprus follows the International Financial Reporting Standards (IFRS), has a mandatory audit regime for all sizes and types of companies, and its legal system is fully compliant with the EU, the Financial Action Task Force on Money Laundering (FATF), OECD, FATCA, the Financial Stability Forum laws and regulations and EU AML directives. The MONEYVAL Committee of the Council of Europe also found Cyprus to be compliant or largely compliant with all its parameters, and CySEC highlights that it is committed to the continued global fight against financial crime.
Challenges and Opportunities
Despite the current challenges posed by the global coronavirus outbreak, Cyprus registers continued interest from local and foreign entrepreneurs and investors in setting up businesses in Cyprus, with CySEC reporting in July 2020 it has some 100 applications for new investment entities in the pipeline. The investment funds and wealth management sector are poised for further growth, and many believe there is scope for more cluster activities. The success of the shipping sector, an industry which contributes approximately €1 billion each year to the economy, has attracted auxiliary services, including the set-up of investment funds specifically designed for the sector – a model that could be successfully replicated for other sectors, for instance for the oil and gas sector. Impact investing and sustainable finance are also on the country’s agenda and have been identified as future growth areas.
However, in various segments, Cyprus positions itself as a place that helps small businesses grow into big companies. Currently, the island is home to many start-ups and smaller firms, all of whom are challenged by the costly introduction of new and complex regulation. The coming years will most likely see a series of mergers and acquisitions in the financial sector. Fintech firms might emerge as the big winner in this climate as financial technology can drive efficiency up and bring costs down. Cyprus should leave no stone unturned in welcoming these financial disruptors in order to benefit from the massive opportunities that fintech presents.
A crucial element especially when it comes to attracting ICT and tech industry players is guarding Intellectual Property (IP), and Cyprus offers strong IP protection through domestic legislation and a network of EU and international agreements. The main feature of the Cyprus IP Box regime is the 80% deduction of revenue earned from the use of intangible assets. This four-fifths exemption from profits means that only 20% of IP income is taxed at the corporate tax rate of 12.5%. After applying the calculations, Cyprus-resident companies can see an effective tax rate as low as 2.5% – the lowest in Europe with tax rates for other IP Box regimes range from 2.5% to 10%. The IP regime of Cyprus is largely responsible for the growing interest in the jurisdiction. Digital goods are increasingly more valuable, and the favourable tax and business environment in Cyprus has made it a hub for digital business goods, IT software, and related services.
Towards Future Growth
There is no doubt that Cyprus’ financial sector will face a more challenging future than initially anticipated. The coronavirus crisis has affected markets worldwide and will certainly leave an impact on the island’s industry. However, the face of the global finance industry is changing as technologies play an ever more important role. Cyprus’ decision to gather experience and expertise in new opportunity areas should help it navigate more challenging times and find a way towards future growth. Meanwhile, the fact that confidence in Cyprus’ fund sector is increasing goes to show that the island can compete with other European finance hubs in more established industries. Cyprus’ finance industry is definitely one to watch. On the international scale, it is still small but there are opportunities aplenty.
For more information, contact Cyprus' investment promotion agency, Invest Cyprus.
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