It’s been a long time since we looked at a jurisdiction in Europe. To make up for this, I will be covering two European jurisdictions in a row.

This week, it’s Cyprus and the week after next, it’s Northern Cyprus.

Cyprus is often compared to the other EU member tax havens: Malta and Gibraltar.

Cyprus has suffered major reputational backlash in recent years, with the temporary (still going) capital controls and the FBME débâcle.

And yes, we will talk in-depth about FBME. Click here to skip right to it (you impatient oaf).

Let me all state upfront that I will not go into detail on the financial turmoil in Cyprus. I trust you as a reader are already familiar with what has happened. There is nothing I can write here that you couldn’t find elsewhere and I have nothing to add on the subject.

Overview

Cyprus has historically strong ties to the United Kingdom, having been a British territory from 1914 until 1960, the Crown Colony of Cyprus or British Cyprus.

Cyprus gained independence after many years of political instability which culminated in a strong anti-British movement by a Greek Cypriot nationalist guerilla. English is still fairly widely spoken, especially in business. The former currency of the island was the Cypriot Pound which until 1972 was tied to the British pound.

It’s all very convoluted but it ended with Cyprus ceding from the United Kingdom under circumstances that cannot be described as amicable. The conditions under which Cyprus was made independent did not adequately satisfy hostilities between the Greek Cypriots and the Turkish Cypriots.

On the 15th of July 1974, Greece – then ruled by a military junta – invaded Cyprus to make it a part of Greece. Turkey saw this as a threat to the Turkish Cypriots and responded by launching an invasion of Cyprus, easily driving out the Greeks in a manner so heavy-handed that it is one of the main catalysts to the Greek military junta collapsing entirely.

The Turks then set up the Turkish Republic of Northern Cyprus, which continues to divide Cyprus. The Turkish invasion is generally seen as legitimate but failure to resolve the dispute has strained Turkey’s relations with the European Union.

In documents issued by many international organizations, Cyprus is always referred to with a footnote. The OECD for example uses this wording a lot:

*1. Footnote by Turkey: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

*2. Footnote by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

While I will save discussing Northern Cyprus for the next Jurisdiction Spotlight post, it is worth mentioning that a large part of Cyprus is de facto not under Cypriot or EU control. But for all intents and purposes, unless specifically mentioned, I will use the term Cyprus to refer to the Republic of Cyprus and territories it effectively controls.

Owing to a very interesting past, the island as a whole under strong Turkish, Russian, Middle Eastern, and British influence – in addition of course to Greek.

Geography and Demography

[table]

;

Full Name:;Republic of Cyprus

Official language(s):;Greek, Turkish

Other major languages:;English, Armenian, Cypriot Turkish, Russian

Type of government:;Constitutional republic

Area:;9,251 km² (including 3,355 km² which de facto is Northern Cyprus)

Timezone:;UTC+2

Population:;1,100,000 (including circa 300,000 people living in Northern Cyprus)

GDP per capita:;26,000 USD

Currency:;Euro

[/table]

Incorporation and Business

Reputation

Bad.

While Cyprus doesn’t have any egregious secrecy laws surrounding companies, it is an eyesore to many European tax authorities which for long have seen Cypriot companies used for tax evasion. The problem here isn’t so much Cyprus as it is the people using Cypriot companies but the negative connotation is there.

Cyprus is also seen as a bit of an anything-goes type of jurisdiction. To some, this means business friendly. To others, this means Cypriot companies are less regulated and more likely be up to no good. There is a perceived blind eye being turned to sketchy business activities by companies in Cyprus, especially non-resident companies.

General Information

Company formation in Cyprus is generally speaking very easy and costs are comparable to those of Gibraltar and generally a lot less than the more complex Malta.

Running a Cypriot business from abroad can be attractive in that it is probably the easiest way to form a tax-free corporation in the EU. UK LLP is easier and cheaper but they are not corporations limited by shares and taxable entities, which for some contexts can be an important distinction.

Regulator

Cyprus company formations take place in the same legal space as all Cypriot companies. There is as such no separate regulator for offshore companies.

Cyprus Private Company Limited by Shares (Ltd.)

There is no IBC legislation in Cyprus. Companies are companies, and although other types do exist, it is the private company limited by shares – very similar to the UK company of same name – which completely dominates the market.

• One director required. Corporate directors permitted.
• One shareholder required (maximum 50). Corporate shareholders permitted.
• One secretary required. Corporate secretary permitted.
• No minimum share capital.
• Registered office in Cyprus.

Taxation

A resident company in Cyprus pays 12.5% tax on profits whereas a non-resident pays 0%.

Cyprus uses a fairly common method to determine corporate tax residency. If a company is controlled and managed from Cyprus, it is tax resident there. Otherwise, it does not owe tax in Cyprus and becomes a tax free company. This, however, is not the full story as I will get to in a few weeks when we dig deep into tax residence.

So why do so many corporate service providers in Cyprus sell a tax residency service? The idea is to make use of one of Cyprus’ many tax treaties. This is often sold with vague promises of reduced tax. This is almost never the case, though, unless a more complex structure is arranged.

VAT registration is mandatory.

Record Keeping

Cypriot companies must keep due records and file annual financial returns.

Small companies are exempt from audits provided that they do not exceed two of the following conditions:

• Net turnover of 7 million EUR
• Total assets of 3.4 million EUR
• 50 employees (average during a year)

Public Records

Cyprus has public records of companies. The following details can be found in these records:

• Company name and address
• Memorandum and articles of incorporation
• Issued and authorised share capital
• Registered shares
• Board of directors
• Charges
• Financial statements

In the case of nominees, the corporate service provider which provides the nominees must know the UBO.

Trusts in Cyprus

In place since 1992, the Cyprus international trust (CIT) law is older than that of a lot of islands but does not quite compete with the old English laws, on which it is modelled.

A Cyprus international trust must have settlors and beneficiaries which are not tax resident in Cyprus at the time of settlement. Beneficiaries may relocate to Cyprus after one year of the trust being formed, in which case income from the trust would be taxable in Cyprus. Otherwise, there is normally no Cypriot tax on a CIT.

CITs can be perpetual. Registration is only required if the trust owns property in Cyprus. Fraudulent conveyance rules are limited to two years.

Confidentiality is strict, but can be pierced with a court order.

Banking

Cyprus has a good banking sector, although it is showing signs of stagnation. Innovation has come to a halt and sophistication of products and internet banking has not improved significantly in recent years. The Cypriot banking sector is currently riding in the coattails of its former glory, and the pace is subsiding.

Opening a Bank Account in Cyprus

You generally need not visit Cyprus but an intermediary is practically always required. On occasion, banks such as Hellenic Bank and Piraeus Bank will accept clients remotely without an intermediary — usually only personal accounts.

There is no shortage of intermediaries in Cyprus. Some banks are even happy to refer you to one.

Cypriot Banks

There are in total 56 banks licensed in Cyprus under various forms of licenses, and two representative offices of foreign banks.

There are seven banks licensed under a local Cypriot banking license. Of these banks, Hellenic Bank and RCB Bank are popular with international clients. Bank of Cyprus and Cyprus Popular Bank (Laiki) used to be, prior to the financial meltdown.

1. Ancoria Bank
2. Bank of Cyprus
3. Cyprus Development Bank
4. Cyprus Popular Bank (being wound down)
5. Hellenic Bank
6. Housing Finance Corporation
7. RCB Bank

Then we have 18 credit institutions. These are usually not relevant in this context.

Next on the list are four banks which are subsidiaries of EU banks. Alpha Bank and Piraeus Bank are very open to international clients, with Eurobank being a bit more cautious.

1. Alpha Bank (Greece)
2. Eurobank (Greece)
3. National Bank of Greece (Greece)
4. Piraeus Bank (Greece)

Then there are two banks which are subsidiaries of non-EU banks. USB Bank is particularly welcoming of international clients.

1. Societe Generale (Lebanon)
2. USB Bank (Lebanon)

Of the remaining 25 banks, nine are branches of foreign banks in the EU. These banks engage with international clients but many are introduced to the Cyprus’ wing only by first being clients with the bank locally.

1. AS Expobank (Latvia)
2. Banque SBA (France, in turn owned by a Lebanese bank)
3. Barclays Bank (UK)
4. CC Bank (Bulgaria)
5. EFG Bank (Luxembourg)
6. Fibank (Bulgaria)
7. TKB Banka (Latvia)
8. National Bank of Greece (Greece)
9. Saxo Bank (Denmark)

The remaining 16 are branches of foreign banks from outside the EU. This is where we find FBME. The other banks mostly use their Cyprus’ entity as a conduit for trade into EU. Occasionally, international clients that don’t fit the EU conduit profile are taken on.

1. Arab Jordan Investment Bank (Jordan)
2. Bank of Beirut (Lebanon)
3. BankMed (Lebanon)
4. Banque Bemo (Lebanon)
5. BBAC (Lebanon)
6. BLOM Bank (Lebanon)
7. Byblos Bank (Lebanon)
8. Credit Libanais (Lebanon)
9. FBME (Tanzania – Lebanon)
10. IBL (Lebanon)
11. Jordan Ahli Bank (Jordan)
12. Jordan Kuwait Bank (Jordan, Kuwait)
13. Lebanon and Gulf Bank (Lebanon)
14. Avtovaz Bank (Russia)
15. Promsvyazbank (Russia)
16. Privatbank (Ukraine)

Lastly, the two representative offices:

1. Atlas Bank (Montenegro)
2. Zenit Bank (Russia)

These two don’t offer any banking service in Cyprus. They simply act as representatives of their home banks.

Banking Secrecy

Being an EU jurisdiction, Cyprus does not offer much in terms of secrecy for EU residents.

For non-EU residents, Cyprus does have some of the strictest banking secrecy in the EU. In the fallout of the Yugoslav wars, it became known that banks in Cyprus had handled money for people such as Slobodan Milošević which caused quite some commotion, especially when Cyprus initially refused to cooperate.

Cyprus is generally not seen as a problematic jurisdiction in terms of secrecy. It does respond to requests for information where legally obligated.

FBME Bank

OK. Let’s take a look at what happened to FBME, a Tanzanian bank operating in Cyprus, with very close ties to Lebanon, and formerly a bank in the Cayman Islands. Did you plot that out in your map? Good, let’s continue.

Background

FBME Bank (often just FBME) traces its roots and ownership back to Lebanon. In 1952, the Saab family formed Federal Bank of Lebanon SAL (FBL). This bank is today one of the largest in Lebanon. This bank in 1982 established the Federal Bank of Middle East in Cyprus, as a separate entity from FBL.

Four years later, the bank renamed FBME and moved its headquarters to the Cayman Islands. The reasons for this were largely down to cost and the Cayman Islands at the time being far more easy-going than Cyprus, not to mention lower tax.

Capital requirements on Cayman Islands banks are essentially set by the CIMA and not by law, meaning that CIMA dictates how well funded a bank must be. In the early 2000s, CIMA found that the Lebanese-Cypriot bank FBME needed to increase its capital to such a degree that the bank decided to move elsewhere.

In 2003, FBME bought a small commercial bank in Tanzania called Delphis Bank. This bank was collapsing and proved a cheap way for FBME to obtain a banking license in a no-questions-asked jurisdiction with zero international reputation. A veritable tabula rasa of surreptitious banking activities.

At this time, FBME in Cyprus became a branch of the Tanzanian bank. For all intents and purposes, though, the bank remained Cypriot. Most operations took place in Cyprus with only enough activities in Tanzania to satisfy the Tanzanian authorities, who were (and still are) very friendly with the Saab family and FBME.

FBME was for long one of the most popular banks in the offshore financial services sector. Virtually everyone had relations with FBME and in certain sectors – such as gambling and shipping – very few companies did not have an account or some relation with FBME or FBMECS.

The bank was an almost entirely purely offshore-focused bank. It did not compete with the local banks and the bank was left largely unattended.

FBME was virtually unheard of outside of the offshore of international finance sector. It attracted clients – mostly international businesses and high-networth individuals – through a vast network of intermediaries and qualified introducers. An introducer could be a customer with a good track record with the bank or an authorised third-party. The bank would usually require intermediaries to be registered for AML supervision somewhere.

Virtually every corporate service provider had a relation with FBME and the bank was tremendously popular.

For one, the bank was perceived as being extra secretive. This was only partly true. On a handful of cases, the bank would lean on its Tanzanian license in order to decline exchanges of information that a Cypriot bank would be obligated to fulfill.

Many wanted to bank with the bank to get their hands on nameless reloadable prepaid cards, issued through the bank’s card services wing FBMECS. These cards were routinely resold by prepaid card sellers.

FBMECS was busted repeatedly by Visa and MasterCard for violating card scheme regulations.

Another factor to FBME’s popularity was its generous kickbacks. Client referrals could earn thousands of euro, which on top of the usual 400 to 1,000 EUR bank account opening fee made it very profitable to take clients to FBME.

The bank was penalized twice by the Central Bank of Cyprus. Once for failing to perform due diligence and once for circumventing the capital controls Cyprus had put in place. Additionally, the bank was popular with HYIPs, Ponzi schemes, and fraudsters including phishers. While this is not unique to FBME, the abundance of such accounts relative to FBME’s size was disproportionate.

FinCEN

On the 15th of July 2014, FinCEN (Financial Crimes Enforcement Network), a bureau of the  United States Department of the Treasury, issued a notice of proposed rulemaking, declaring FBME a foreign financial institution of primary money-laundering concern.

A lot has already been written on the matter. Instead of spending time rewriting what others have written, go ahead and read FBME’s version, an article by Steptoe & Johnson LLP, or a sensationalist summary by Legal Floris.

In short, FinCEN has accused FBME on being a knowing conduit for money laundering, particularly with ties to the militant wing of Hezbollah as well as organized crime and fraud. FinCEN also accused FBME of knowingly taking on clients with incomplete KYC.

Is this true? FBME was indeed very popular with criminal elements, but so are a lot of other banks. FBME also had shortcomings in KYC which towards the last year or so the bank tried to remedy by exercising extremely careful due diligence, but it was still possible for a trusted intermediary to bypass most of these and settle for the bare minimum. Again, this is not unique for FBME but FBME was singled out.

The Cypriot authorities have suspended FBME’s operations and installed supremely unimpressive management of the bank, taking customer withdrawals to a grinding halt.

The Tanzanian authorities followed suite but have taken a much more lenient approach.

The dispute is unsettled and is currently pending ruling by an international arbitration court where FBME is citing a trade agreement between Cyprus and Lebanon.

What will happen to my money in FBME?

Unknown. Unclear. Uncertain.

At the time operations were suspended, the bank was highly liquid.

There are a lot of possibilities.

The bank might be sold, which should mean funds are safe.

The bank might be shut down, which would leave Cyprus to pay out deposit insurance for accounts held there and Tanzania for accounts held there.

The bank might resume operations, which is quite unlikely as it looks right now.

The bank might be shut down in Cyprus but resumed in Tanzania.

The bank might be split and partially sold, shut down, or resumed in the different jurisdiction.

Has this happened before?

Yes – maybe.

Other banks have been declared money laundering nests by FinCEN and been shut out of the USD financial system, which often means the banks also loses EUR and GBP or at the very least has its supply severely limited.

In Latvia, Multibanka was effectively shut down for over a year before being sold to new owners and trust restored in the bank enough for FinCEN to lift the ban.

In Andorra, Banca Privada d’Andorra (BPA) is undergoing a similar process. The difference there is that the Andorran authorities have proven themselves competent and responsive — a stark contrast to the Cypriot authorities.

Living in Cyprus

Quality of Life

Cyprus is warm and safe, with generally high standards of living. It is comparable to other European Mediterranean nations. Power will go out every once in a while, nepotism is the norm, and there is the whole Northern Cyprus split. Things you either can’t stand or learn to live with.

Being a former British territory and because the island is a major tourist destination, English is well spoken. Much of the government is bilingual and business is often conducted in English.

Taxation

Generally low and attractive.

Cyprus has enacted a relatively complex tax code. It is out of scope for this article to go in-depth on this.

As noted above, a resident company typically pay 12.5% corporate tax.

Immigration and Relocation

As an EU country, it’s very easy for EU and EEA national to settle here.

For other nationals, there are special programmes for high-networth individuals, including a Citizenship-by-Investment programme. For an investment of 2.5 million EUR, one can obtain a Cypriot citizenship and passport with all its bells and whistles.

As an EU member and a jurisdiction with generally good diplomatic ties, a Cypriot passport can be used for visa-free entry into over 150 jurisdictions.

Final words

Cyprus is on paper one of Europe’s finest tax planning jurisdictions, comparable to both Malta and Gibraltar.

However, Cyprus has sustained reputational damage with the capital controls, the FBME affair, a criticized citizenship-for-investment programme, and turning a blind eye to sketchy financial dealings (although nowadays intra-EU dealings are well monitored).

The jurisdiction boasts an attractive corporate law and tax code coupled with overall good banks that are open to riskier structures.

Living in Cyprus is favourable from a tax perspective and generally enjoyable.

See also

• OECD Peer Review (also has a list of TIEA and DTA)
• Financial Secrecy Index
• FATF documents
• CFATF documents

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