Brexit, UK Firms – CySEC, CIFs, MiFID and EU Passporting
The United Kingdom became a ‘third country’ on the 1st of February 2020, due to the withdrawal from the European Union. The EU laws, including MiFID II and EU passporting, still apply in the United Kingdom until the period ending on the 31st of December 2020. The European Union Withdrawal Agreement provides for a transition period, for negotiations between the two parties to form the new partnership. As of the time of writing this article, this new partnership agreement is not clear, yet regardless of its outcome, the United Kingdom will be treated as a country that is not member of the EU – in other words, a ‘third country’.
In this commentary we discuss
A. The impact for UK Investment Firms due to the Brexit, including
1. EU passporting,
2. EU Branches,
3. MiFIR and EU counterparts,
4. EU subsidiaries.
B. The attractiveness and benefits of acquiring an authorized CySEC Investment Firm
1. Cyprus and EU passporting,
2. Attractive tax regime,
3. Low set-up and operational costs,
4. Time frames for obtaining an authorized CySEC Investment Firm.
A. What does Brexit mean for UK Investment Firms, at the end of the transition period – 31 December 2020?
1. EU Passporting – All investment entities established and authorized by the FCA will lose the EU passporting carried with their authorization and will no longer benefit from the MiFID II regulation and the provision of MiFID investment services and activities within the European Union. Subsequently, all UK investment firms will become third country investment firms. This means that UK investment firms will no longer be allowed to provide services in the EU using their current authorisation.
2. EU Branches – All UK investment firms with established branches in EU will need to comply with the national requirements of the particular member state. In addition, the services and activities allowed to be provided are limited to the member state where the branch is established. The UK investment firm EU branch will become the equivalent of a branch of a third country investment firm.
3. MiFIR and EU counterparts – Regulated Markets (RMs), Multilateral trading facilities (MTFs) or Organised trading facilities (OTFs) authorized in the United Kingdom will cease to be eligible venues for the purposes of the MiFIR derivatives trading obligation. Therefore, EU counterparts will no longer be able to undertake trades on these platforms.
Our team through our transaction reporting advisory has been conducting health checks over the transaction reporting arrangements in place, with a range of findings and has been advising investment firms impacted by Brexit on how to remain compliant. The team at SALVUS that specializes on transaction reporting was the first and only team to submit on time for the then newly introduced EMIR requirement in 2014, and then designed the project specifications for in-house solutions on MiFIR transaction reporting in 2018.
4. EU subsidiaries – In cases where a UK investment firm has an EU subsidiary investment firm, this EU investment firm is established as an independent company. Therefore, the EU subsidiary can continue its operations as normal since these firms have obtained a MiFID authorization which also carries EU passporting.
It is worth noting that in cases where the EU MiFID subsidiary firm utilizes the resources of the UK firm will be subject to assessment of the competent authorities of the EU firm. This assessment will be necessary as the UK firm will be non-EU entity and thus a third country firm. Additionally, the UK firm being a third country will not be excluded from potential consolidated supervision at a group level.
B. The attractiveness and benefits of acquiring an CySEC regulated Investment Firm.
A Cyprus Investment Firm (CIF) is rightly considered as one of the most suitable mechanisms by those wishing to professionally offer and perform regulated investment services and activities within the European Union and internationally, on certain financial instruments.
1. Cyprus and EU passporting – The Republic of Cyprus in addition to being one of the 27 member states of the European Union and one of the 19 members of the Eurozone is, also, a member of the Council of Europe, the International Monetary Fund, the United Nations, the British Commonwealth, the World Bank and the World Trade Organisation. Furthermore, the island is signatory to a large number of international conventions and treaties. This establishes Cyprus as one of the world’s most flexible international business hubs with a modern legislation.
By extension of all these memberships, a CIF through what is called passporting, can use the license granted by CySEC to offer cross-border investment services or establish a branch in another EEA jurisdiction without the need to obtain any additional licenses.
2. Attractive tax regime – Cyprus is ranking high in terms of its tax regime attractiveness and is considered a favorable jurisdiction for holding and investment services companies.
- The net profits from CIF’s activities are subject to an inviting corporation tax of 12.5%.
- Gains from the sale of titles, and, in most cases, dividends received are exempt from tax.
- There is no withholding tax for non-residents on dividend, interest and royalties paid.
- All gains of capital nature are not taxable in Cyprus – except for the 20% tax on gains on immoveable property that is in Cyprus, and on any gain from the sale of shares in companies that own immoveable property in Cyprus.
- The Republic of Cyprus has a wide network of double tax treaties agreements.
- Finally, some of the services offered by the CIF are exempt from VAT (Value Added Tax).
3. Low set-up and operational costs – The costs of incorporating a company, the administration costs, the high competence of professionals and the costs of providing professional services are generally lower than most other member states in the European Union that have a similar profile in terms of international memberships, tax regime and legislation framework.
This extends from office space to recruiting and salaries to professional services providers. Should you want to build a team in Cyprus, the country boasts a diversified, skillful and well-educated workforce and in the past decade the workforce locally available has grown to be a multilingual community, specializing in different roles within investment firms.
Should you be interested to read about relevant topics on the Investment & Ancillary Services under a CySEC license and the MiFID II Instruments, feel free to visit our earlier article.
4. Time frames for granting an authorized CySEC Investment Firm
- Incorporation of Cyprus Company, between five to ten working days,
- Preparation of the application, approximately one month from the day all documentation is provided,
- Pre-licensing approval by CySEC, will take approximately three to five months for the fulfillment of the conditions and we support you with the provision of consulting and guidance on all regulatory requirements for ensuring the granting of the final Authorisation.
- Deposit the minimum capital required*, three to four weeks prior to the granting of the CIF Authorisation,
- Lastly, CySEC needs to be invited for an activation inspection. The regulator will examine the rented office according to the needs of each control function, the hired personnel, the established systems and procedures and so on. Unless, CySEC has a comment that needs to be addressed following the inspection, the license will be taken to the Board of CySEC for the final license approval.
* The minimum initial capital needs to be deposited in a bank based in the European Economic Area and blocked until the CIF pre-license is granted.
Overall, the CIF authorization by CySEC takes on average of eight months considering that there are no exceptional circumstances surrounding the application. It is possible to utilize the fast track scheme of CySEC based on which there is an additional fee of EUR 25.000 paid to CySEC which can reduce the processing time of the application by CySEC.
Should you be interested to read about relevant topics on the Investment Firms sector, feel free to visit an earlier published article “CySEC, Setting up a CIF, types & application fees” which provides details on
- the different types of CIFs based on their capital requirement,
- the fees payable to CySEC, and
- the initial contributions to the Investor Compensation Fund (ICF).
It is worth mentioning, that the legal framework of the Investors Compensation Fund (ICF) was upgraded last year, introducing new fees and other changes.
SALVUS and our chosen associates can provide the full range of services required to support Cyprus Investment Firms, before, during and after the granting of the CIF authorization. As we deal in Licensing, Compliance and Internal Audit, our services beyond the CIF License application, include Activation support, ongoing Compliance Officer support, and Internal Audit Services among others.
We as SALVUS remain committed to add value by diligently monitoring our clients’ CIF applications throughout the application process and after its authorization. We work to warrant that all the relevant items, capital, personnel and structure are optimized to the full extent.
Talk to us. Do not hesitate to contact us if you require further information. We will be glad to support you in finding an appropriate solution or answering your questions.
The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.