Obtaining a banking licence in Cyprus - YB Case 2024

Obtaining a banking licence in Cyprus

Obtaining a banking licence in Cyprus

Introduction

Obtaining a banking licence in Cyprus is a comprehensive and intricate process, requiring a in-depth understanding of the country's financial system as well as the associated benefits. Cyprus boasts a highly developed financial sector, with strong integration into international financial structures due to its membership in the European Union. This integration fosters a stable and predictable economic environment, essential for banking operations.

Acquiring a banking licence in Cyprus grants access to the single European market, allowing banks to offer a diverse range of financial services within the country and across Europe. A key advantage of this licence is Cyprus's favourable tax regime, which includes one of the lowest corporate tax rates in the EU. This attractive taxation system makes Cyprus a desirable destination for banking institutions seeking a cost-effective base of operations.

Additionally, Cyprus is renowned for its well-developed banking infrastructure, supported by a robust network of professional financial advisory and audit services. These resources provide licensed institutions with essential support at every stage of their operations. The country's strict compliance with international AML/CTF standards offers an additional layer of security for both banks and their clients, reinforcing trust in the Cypriot financial system.

Banking regulation in Cyprus aligns with all relevant European Union directives and regulations, ensuring a high level of transparency and reliability in banking operations. This compliance underscores the credibility of the Cypriot banking sector, fostering confidence among stakeholders and facilitating cross-border banking activities.

Overall, obtaining a banking licence in Cyprus can open the door to a wide range of European financial opportunities, offering stability, reliability, and advantageous conditions for conducting banking business. By meeting the rigorous regulatory requirements and embracing the benefits of the Cyprus financial system, licensed institutions can position themselves for success within the European market.

The cost of a banking licence

Obtaining a banking licence in Cyprus generally incurs lower costs compared to other offshore jurisdictions, primarily because it does not require the registration of a new company. However, the application process involves a significant amount of documentation, requiring careful preparation and substantial time to submit the necessary paperwork to the CBC.

Once the application process begins, all documentation must be maintained in English, which could present a challenge for entities from CIS countries, where English is not the primary language. To expedite the preparation and submission of documents, it is advisable to work with experienced lawyers who have a proven track record in registering banks, companies, and representative offices in offshore jurisdictions, particularly in Cyprus.

Frequent changes to the regulatory framework can complicate the application process. Applicants may find that after preparing a set of documents, additional requirements arise, leading to delays in obtaining a licence and starting business operations.

A banking licence in Cyprus subjects a bank to ongoing inspections and regulatory oversight. Depending on the company's management structure, various compliance requirements may apply. Banks must ensure that they adhere to all relevant regulations and maintain accurate records.

Violations of regulations can lead to serious consequences, including temporary suspension of the licence or complete revocation of the Cypriot banking permit. To mitigate the risk of non-compliance, banks should regularly consult experienced legal professionals to ensure they meet all regulatory standards and avoid issues during inspections. This proactive approach can help maintain a strong reputation at the international level and minimise the risk of regulatory sanctions.

Stages and requirements

To establish a banking institution in Cyprus, you must select the most suitable legal entity. The following are the common types of legal entities used for banking activities in Cyprus:

JSC is the preferred structure for banks. It requires a min authorised capital, and shares can be open or closed to the public. The JSC offers strict corporate governance and mandatory reporting, providing transparency and accountability.

PLC cannot engage in direct banking activities, it is often used to own shares in a bank. Shareholders' liability is limited to their contributions, but there are restrictions on the number of shareholders and public trading of shares.

Offshore company commonly used for international financial transactions, offshore companies benefit from tax advantages but are not suitable for direct banking operations in Cyprus. However, they can be used for managing foreign assets or specific transactions within a banking group.

Given these options, JSCs are the most suitable for establishing a bank in Cyprus, as they meet all regulatory requirements and ensure adequate shareholder and customer protection. Other legal structures may be used for ancillary activities within a banking group.

Licensure algorithm

The process of registering a bank in Cyprus involves multiple stages, each requiring careful planning and strict compliance with regulatory requirements:

Phase 1:
Preparatory: this initial stage involves conducting a market analysis and developing a business plan that aligns with the Cypriot financial sector. You must also determine the bank's ownership and management structure and select a unique name for the institution.
Phase 2:
Legal registration: in this stage, you register the legal entity that will operate the bank. This involves preparing foundational documents, such as the company's charter and internal regulations.
Phase 3:
Submitting an application to the CBC: this critical stage requires submitting a comprehensive application to the CBC, including a business plan, information about beneficial owners, proof of financial stability, and details about the management team's professional experience.
Phase 4:
Capitalisation: to meet regulatory requirements, you must deposit the required authorised capital into a blocked account with the CBC.
Phase 5:
Obtaining a licence: after a thorough review by the CBC, which may include interviews with key personnel, the bank is issued a licence to operate.
Phase 6:
Registration with tax authorities and social funds: the bank must register as a taxpayer, obtain a TIN, and register with social funds for future employees.
Phase 7:
Completion of registration and start of activities: this final stage involves opening correspondent accounts, setting up internal processes, and connecting to payment systems. Once these steps are completed, the bank can officially open and start serving customers.

List of required documents

  • Licence application signed by authorised persons.
  • Business plan contains information about the bank's management structure, range of products, marketing strategy, and financial forecasts.
  • Foundational documents: Articles of Association, Memorandum of Incorporation, and Certificate of Registration.
  • Proof of financial status: documentation confirming the authorised capital and its sources.
  • Beneficial ownership information: detailed forms for each owner, director, and manager, including personal data, education, and experience.
  • Internal control policies.
  • Professional qualifications: evidence of the qualifications and experience of key employees and managers.
  • Internal audit system: appointment of an external auditor and establishment of an internal audit system.

The CBC may request additional documents or clarifications during the review process. Successfully meeting these requirements is crucial to obtaining a banking licence.

To obtain a banking licence in Cyprus, the min authorised capital is 5 million euros. This capital can come from various sources, including capital instruments, premium income accounts, retained earnings, and other reserves. In some cases, the CBC may permit an initial capital lower than the specified limit, but not below 1 million euros.

The timeframe take up to six months. Once the licence is approved, the bank must be ready to operate within the next 12 months.

Taxation system

The corporate tax is 12.5%, which applies to net profits generated within and outside the island. Corporate taxpayers in Cyprus can also benefit from a range of tax exemptions and incentives, however, banks can leverage various deductions, such as those for depreciation and R&D expenses, to lower their taxable income. Given these nuances, it is crucial for banks to engage experienced tax professionals who can navigate Cyprus's corporate tax landscape and ensure compliance with all relevant regulations while maximising tax benefits where applicable.

Audit and accounting

The audit process for registered banks is governed by strict regulations from the CBC. An annual audit by reputable external audit firms is mandatory, focusing on both the bank's financial health and its compliance with regulatory standards, including prudential regulation and financial reporting.

The audit begins with an application to the CBC, where the bank must demonstrate compliance with auditing standards. External auditors thoroughly review the bank's financial statements, ensuring they meet the required criteria. If discrepancies are found, the bank must take corrective action to remain compliant.

An audit is more than a formality; it is a fundamental component in establishing and maintaining trust between the bank and its clients, as well as with regulatory authorities. Preparation for audits requires collaboration with experienced accounting firms specialising in banking.

Banks must follow stringent rules set by Cypriot legislation and IFRS, ensuring transparency and building trust among clients and investors.

One crucial aspect of accounting services is the preparation of financial statements in accordance with IFRS. Banks must establish robust systems to accurately record all transactions and provide detailed disclosures about assets, liabilities, risks, and risk management practices.

Restrictions

Certain individuals and entities are ineligible to obtain a banking licence due to legal, ethical, or financial reasons. Here are some key groups and individuals who cannot obtain a banking licence in Cyprus:

  • Entities lacking financial stability
  • Entities with non-compliant corporate governance
  • Entities with regulatory violations
  • Entities involved in illegal or unethical activities

Overall, banking activities require a high level of financial integrity, compliance, and corporate governance. If an entity or individual does not meet these requirements or has a history of criminal activity, regulatory violations, or financial instability, they will not be granted a nation’s banking licence.

The CBC holds the authority to revoke a banking licence under certain conditions. Revocation is a serious measure, typically taken when a bank fails to meet regulatory requirements or poses a threat to the stability of the financial system. Below are some common reasons for revocation of a licence:

  • Regulatory non-compliance
  • Inadequate risk control
  • Insolvency
  • Fraud or misconduct, including money laundering or terrorism financing
  • False or misleading information
  • Failure to disclose material information
  • Inadequate corporate governance
  • Repeated regulatory violations

Revocation of a banking licence is a serious action that can have significant consequences for a bank's stakeholders, including employees, customers, and investors. Banks facing licence revocation typically have the opportunity to appeal or correct the issues, but if corrective measures are not taken, revocation becomes inevitable.

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