Cryptocurrency Regulation in Cyprus

Crypto Regulation in CyprusThe regulatory framework of cryptocurrency ecosystem in Cyprus is harmonised with crypto legislation in the European Union (EU) and therefore is currently mainly focused on consumer protection, anti-money laundering and counter-terrorist financing. The rules of the framework span from the registration of the cryptocurrency companies to the monitoring of their operations.

The main legislation that distinguishes and regulates cryptocurrencies in Cyprus is the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007 (the AML/CFT Law), enforced by the the Cyprus Securities and Exchange Commission (CySEC) who’s responsible for supervising compliance with regulations of anti-money laundering and counter-terrorist financing (AML/CFT) among crypto asset service providers (CASPs) operating in or from Cyprus.

The CySEC also manages the Innovation Hub, established to contribute to the development of the financial ecosystem in Cyprus by offering guidance on regulations and compliance as well as initiating a dialogue that helps the authorities to gain better understanding about the concerns and ideas expressed by the market participants.

A CASP is a person who provides or exercises one or more of the following services or activities to another person or on behalf of another person:

  • Exchange between crypto assets and fiat currencies
  • Exchange between crypto assets
  • Management, transfer, holding and/or safekeeping, including custody, of crypto assets or cryptolicence keys or means which allow the exercise of control on crypto assets
  • Offering and/or sale of crypto assets, including the initial offering
  • Participation and/or provision of financial services regarding the distribution, offer and/or sale of crypto assets, including the initial offering

 

According to the AML/CFT Law, the main obligations of CASPs are:

  • Implementing KYC and other customer due diligence procedures
  • Drawing economic profiles of their clients
  • Identifying sources of funds of their clients
  • Monitoring the clients’ crypto asset transactions and wallet addresses
  • Identifying and reporting suspicious transactions

Another component of the Cypriot regulatory framework is the directive on the Register of Providers of Services Regarding Crypto Assets (the CySEC Directive), pertaining to the above-mentioned AML/CFT Law. The CySEC Directive regulates the creation, maintenance, operation and changes of the CASPs Register and determines conditions for their inclusion into the Register.

The following CASPs are subject to the CySEC Directive:

  • Crypto companies providing or carrying out services or activities from Cyprus, regardless of them being registered with other registers of the EU countries.
  • Crypto companies providing or carrying out services or activities in Cyprus, other than persons providing or carrying out services or activities in Cyprus relating to cryptocurrencies and which are registered in another EU country for the services or activities they provide.

The CySEC supervises CASPs by carrying out the following key tasks:

  • Managing CASP registration process
  • Determining suitability and competences of CASP’s board of directors and beneficiaries
  • Evaluating suitability of CASP organisational structure
  • Evaluating suitability of internal cybersecurity mechanisms
  • Monitoring performance of KYC measures which focuses on the identification and reporting of suspicious transactions
  • Identifying the source of client funds

Classification of CASPs activities determining a type of crypto licence:

  • Class 1 (initial capital – 50,000 EUR) – CASPs providing investment advice
  • Class 2 (initial capital – 125,00 EUR) – CASPs providing the service referred to in Class 1 and/or any of the following services:
    • Reception and transmission of client orders
    • Execution of orders on behalf of clients
    • Exchange between crypto assets and fiat currency
    • Exchange between crypto assets
    • Participation and/or provision of financial services related to the distribution, offering and/or sale of crypto
    • Assets, including the initial offering
    • Placement of crypto assets without firm commitment
    • Portfolio management
  • Class 3 (initial capital – 150,000 EUR) – CASPs that provide any of the services referred to in Class 1 or 2 and/or:
    • Administration, transfer of ownership, transfer of site, holding, and/or safekeeping, including custody, of crypto assets or cryptolicence keys or means enabling control over crypto assets
    • Underwriting and/or placement of crypto assets with firm commitment
    • Operation of a multilateral system, which brings together multiple third-party buying and selling interests in crypto assets in a way that results in a transaction

How to Open a Cryptocurrency Company in Cyprus

When planning to carry out crypto activities in or from Cyprus, it’s mandatory to start with establishing a company in Cyprus which will then enable a CASP to apply for the CASP registration.

The most popular type of business structure in Cyprus is a Private Limited Liability Company (LLC) which can be established by foreigners.

Key requirements for a Private Limited Liability Company:

  • A fully operational office must be established in Cyprus, including hiring local staff on a full-time basis
  • No minimum share capital requirements
  • A secretary and at least one director are required (a director and a secretary can be the same person as this company can be a single-member company)
  • Demonstrated adequate policies and procedures in compliance with local regulations
  • Effective internal organisational structure designed for transparent and frictionless functioning of the company

The most popular crypto business activities in Cyprus:

  • Initial coin offerings (ICOs)
  • Cryptocurrency mining
  • Cryptocurrency exchanges
  • Management and administration of crypto wallets
  • Crowdfunding for crypto startups
  • Installation of cryptocurrency ATMs

Key steps for opening a Private Limited Liability Company for crypto activities  in Cyprus:

  1. Reserving a unique company name
  2. Preparing the necessary documentation (memorandum of association, articles of association, founder identification documents, etc.)
  3. Submitting an application and required documentation for the approval with the the Cyprus Registrar of Companies
  4. Settling company registration fees with the Cyprus Registrar of Companies
  5. Opening a corporate bank account
  6. Registering with the Tax Department
  7. Applying for CASP registration with the CySEC

Every Cypriot company must pay an annual fee of 350 EUR to the Registrar of Companies, the deadline for which is the 30th of June of each calendar year.

Requirements for CASPs Registration

All CASPs planning to provide services in or from Cyprus are obligated to formally register with the CySEC before starting their operations. The consideration of the application normally takes up to 6 months.

If a CASP is established in the European Economic Area (EEA) or a third country and registered with one or more respective national authorities for AML/CFT purposes in relation to all services or activities undertaken or intended to be undertaken in Cyprus (i.e. involving Cypriot residents, including incorporated or unincorporated Cyprus-based companies), it’s a must to submit a notification to the CySEC, providing evidence in relation to the valid registration for each service or activity. Where these services or activities are not covered by the framework that governs the registration for AML/CFT purposes, an application to be registered as a CASP with the CySEC should be submitted.

Requirements for the applicants:

  • A company incorporated in Cyprus
  • Good reputation, knowledge, experience and skills of company’s directors (founders)
  • A minimum of 4 directors, two of which will manage the business activities and the remaining two will be independent
  • Establishment of appropriate internal policies and procedures in accordance with the regulatory framework
  • Provision of initial capital
  • In case of online operations, a website owned and operated by the applicant should be shared
  • Proof of no conflict of interest between its staff and clients
  • Arrangement of transparent and functional governance and operations
  • Design of secure data processing and protection systems and procedures to prevent losses or unauthorised access of clients’ crypto-assets data
  • Establishment of administrative and accounting workflows as well as effective risk assessment procedures

Capital requirements for the applicants:

  • The initial capital requirements depend on the aforementioned classification of crypto activities and range from 50,000 EUR to 150,000 EUR
  • The own funds must be maintained at all times and be at least equal with the greater amount of the following:
    • The required initial capital as per the classification of crypto activities
    • 25% of the CASP’s fixed expenses during the previous year. This condition will be imposed gradually:
      • 1 January 2022 – 30% of the above-mentioned amount
      • 1 January 2023 – 60% of the above-mentioned amount
      • 1 January 2024 – 100% of the above-mentioned amount

How to Register with the CySEC

First of all, CASPs planning to provide services in or from Cyprus must fill out an application form, which includes a variety of questionnaires and requirements to attach all relevant documents.

The submission of an application should be made in a printed form and accompanied by a USB flash drive, which should contain one unlocked PDF file with all documents attached to the application as well as a relevant certificate confirming that the content of the USB flash drive is the same as the original documents submitted to the CySEC.

A prerequisite for accepting the application is the payment of the applicable fees to the CySEC accounting department, located at “AIAS” Building, Diagorou Str. 19, 1097 Nicosia, on the 1 st Floor and the presentation of the relevant receipt. Therefore, all applicants should first visit the accounting department to settle the fees and collect the receipt which can only be issued after showing either the application for granting authorisation or a copy of its first page. The receipt will enable them to present relevant documents to the department located on the ground floor of the same building.

The fees are as follows:

  • 10,000 EUR – consideration of an application (non-refundable)
  • 5,000 EUR – annual renewal of registration

Successful applicants won’t be required to pay a renewal fee for the first year of their registration.

The fees might also be paid via bank transfer in which case the accounting department should be notified via email [email protected] by referencing a relevant request of service and attaching the first page of the application form along with the proof of the bank transfer. Once the payment is received, the accounting department will email the receipt.

Applicants should be prepared to include the following information in the application:

  • Company details (from its name and registered office address to a clear definition of the services a company intends to provide)
  • Information about the capital (amount, sources, relevant contracts) proving that the CASP owns funds required by law
  • Information about the beneficiaries (group structure, including names and relationships) who must be of good repute and have the ability to maintain a sound financial structure for the CASP
  • Information about the company’s board of directors (a relevant questionnaire, proof of suitability to hold a management position, details about induction and training of the management) who must have impeccable reputation, be knowledgeable, skilled, experienced and capable of carrying out their duties
  • Financial details (forecast information and financial statements where applicable)
  • Organisational and operational information (initial three-year operations plan, organisational structure and internal procedures) proving that the company will act in the best interests of its customers as well as minimise risks of loss or imprudent operations

A CASP Register application should be accompanied with an extensive list of documents proving that the company complies with the local regulations. The following documents should be attached to the application form:

  • All corporate documents of the crypto company (incorporation certificate, certificate of directors, shareholders, HQ address, internal operation manual, etc.)
  • Business plan, including marketing strategy and financial/accounting workflows
  • Documentation of internal AML/KYC procedures, including customer onboarding workflows
  • Addresses of all crypto asset wallets and public keys managed by the CASP
  • Documentation of data management workflows and procedures

Upon obtaining the authorisation and the posting of the company’s name on the CySEC website, the company should contact the Information Technology Department via email [email protected] with the reference “TRS Credentials – company name – authorisation number” to obtain its credentials for the CySEC Portal in order to electronically submit company-related information and documents.

The CySEC publishes the Register on its website, which is accessible to the public, providing the following information about the registered CASPs:

  • Name, trading name, legal type and legal entity identifier
  • Physical address
  • Services being offered and/or the activities the CASP may legally offer and carry out
  • Website address of the business

Registered CASPs are allowed to request the following amendments that may cost 1,000-5,000 EUR:

  • Changes in the services or related activity of the provider
  • Update of the crypto wallet address
  • Updated details of a board member or any member of management
  • New details about beneficiaries
  • Updates of the provider’s website

Taxation of Cryptocurrency Companies in Cyprus

Cypriot cryptocurrency companies are obligated to pay the same taxes as other types of businesses. They can also be eligible to receive applicable tax allowances and benefit from over 65 double taxation agreements between Cyprus and other countries.

The standard Corporate Income Tax rate in Cyprus is 12.5% which is one of the lowest ones in the EU. If a company is a tax resident (incorporated or registered) in Cyprus, all of its income sourced locally and abroad is subject to taxation. The tax is paid provisionally and is based on self-assessment which can be reviewed by the taxpayer anytime before the 31st of December of the relevant tax year. The payments are done twice a year – on or before the 31st of July and the 31st of December. Overpaid taxes are returned, whereas uncorrected underpayments result in paying annual interest at the rate of 3,5%.

Resident shareholders and Cyprus tax resident companies are subject to paying Special Defence Contribution. In all cases it’s paid by the company and is levied on dividends, passive interest and rental income. The rates, including exemptions, vary as follows:

  • Dividends received by a resident shareholder from Cyprus resident and tax non-resident companies ‐ 17%
  • Dividends received by Cyprus tax resident company is usually 0%, unless they don’t meet certain conditions
  • Interest income sourced from the ordinary activities of the business, received either by a resident shareholder or a tax resident company – 0%
  • Other interest income received either by a resident shareholder or a tax resident company – 30%
  • Rental income (less 25%) received either by a resident shareholder or a tax resident company – 3%

The standard VAT rate in Cyprus is 19% and it’s imposed on the sale of products and most services in Cyprus. However, according to EU law, the provision of services involving the exchange of cryptocurrencies into traditional currencies and the exchange of traditional currencies into cryptocurrencies isn’t subject to VAT.

Reporting Requirements in Cyprus

Crypto companies operating in or from Cyprus must comply with the International Financial Reporting Standards (IFRSs). Managing directors are obligated to maintain transparent and accurate records for the preparation of financial statements and clarification of transactions.

Accounting records must be kept at the company’s registered office for 6 years from the end of the relevant year, and shall be prepared to be presented to the Tax Department upon their request or visit.

Financial statements should be presented to the company’s shareholders at the annual general meeting which can first take place within 18 months from the company’s incorporation. Furthermore, the financial statements have to be audited by an authorised local auditor in line with the rules of the IFRSs. It’s important to note that an audit is mandatory for all companies registered in Cyprus regardless of their size or activities.

Every year, within 42 days from the company’s annual general meeting, audited financial statements must be submitted to the Registrar of Companies along with the annual return form.

Non-compliance with reporting and auditing obligations is considered a criminal offence which company’s managing directors are liable for.

 

Our team of highly experienced lawyers will be more than happy to provide you with tailored support in registering with the CySEC and in obtaining a crypto licence in Cyprus. Not only are we well prepared to guide you through the crypto application process, we’re dedicated to helping you to establish a company in Cyprus, to optimise taxes and to provide accounting services.

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