A critical approach on th Law Regulating the provision of Administrative Services

(Please refer to our website for the full article)

A. INTRODUCTION – THE LAW

The provision of administrative, namely, fiduciary, trustee, corporate and related services, is a regulated activity and not freely exercised, unless relevant Licence is granted to the person providing such services.

The law regulating the provision of administrative services is the “Law Regulating the Businesses Providing Administrative Services and Related Matters of 2012, Law No. 196(I)/2012, as amended, hereinafter referred to as “the Law”.

The aim of the Law is to regulate the provision of administrative services from companies that do not fall within the exceptions identified in the Law. Advocates, members of the Cyprus Bar Association, qualified accountants, members of the Institute of Certified Public Accountants of Cyprus (“ICPAC”), and other specified categories of companies and legal persons and their subsidiaries, are exempted from the provisions of the Law and do not need a Licence to offer administrative services.

The said categories of persons and their respective companies or subsidiaries, as well as their employees, are exempted from the obligation to receive a Licence as per the provisions of the Law, as they are regulated by their respective professional bodies or other regulatory authorities.

The provision of administrative services, being a regulated activity, can be offered, in Cyprus or from Cyprus, only by Licenced companies or by the exempted by Law companies or persons. The Cyprus Securities and Exchange Commission hereinafter referred to as “the Commission”, is the regulatory authority responsible for the implementation of the provisions of the Law and grant the relevant Licences.

The Law identifies in detail as to which are the administrative services requiring a Licence, what are the conditions and procedure of receiving such a Licence, as well as extending, amending, withdrawing and terminating its validity.

Additionally, the Commission is entrusted with extensive powers and with authority to impose heavy administrative fines in case of any violation of the Law in addition to the criminal offences established in case of such violation.

With this publication we give an analysis of the Law, in order to assist companies already in the business of the provision of administrative services and also new prospective companies who would like to deal with such activities and understand its provisions.

The positive aspect of the Law is that now the administrative services sector, is well regulated for all the players in the field.

The new Law fills a vacuum that existed in the legislation and complements effectively the laws which are already in force and specifically the Cyprus International Trusts Law, No.69(I)/1992 and the legislation as to the Prevention and Suppression of Money Laundering Activities Law, No.188 (I)/2007.

The issues created

The Law, as enacted, raises various legal and implementation issues. The complications created, the mismatches in its implementation by the regulating authorities, the discrimination and unconstitutionality of certain of its provisions, are commented accordingly in an attempt, those responsible for correcting such issues, to take positive steps and cure any defects.

B. DEFINITIONS AS PER THE LAW

“Licenced person” – “Αδειούχο πρόσωπο” means the company established (incorporated) under the Companies’ Law Cap. 113, which holds a Licence under the provisions of the Law;

(Our comment 1: As per the provisions of the Law, only Cyprus incorporated companies pursuant to the Companies’ Law Cap.113, may apply to obtain such a Licence.

Foreign, or EU registered companies, or physical persons, or branches of foreign companies declaring a place of business in Cyprus, or Partnerships registered pursuant to the Partnerships and Business Names Law, Cap.116, do not have this possibility and right.

​This limitation might bring the Law in direct conflict with well-established principles of EU Law as it discriminates against EU companies and creates limitations on the freedom of movement, establishment, work, employment and related principles).

“Licence” means the approval and registration of the Licenced person in the Register kept by the Commission;

“Entitled persons” – “Δικαιούχα πρόσωπα” means the Exempted Persons who are regulated by their respective regulatory authorities as well as the Licenced persons;

“Exempted person” means:

I. An Advocate or an Advocates’ Limited Company (LLC) as defined in the Advocates’ Law, Cap. 2 as amended; a general or limited partnership whose general partners are either Advocates or an Advocates’ Limited Company (LLC) and are regulated by the board of the Cyprus Bar Association in its capacity as Regulatory Authority in the framework of the Prevention and Suppression of Money Laundering Activities Law, No.188 (I)/2007;

II. Members of the Institute of Certified Public Accountants of Cyprus (ICPAC); a general, limited partnership or a limited liability company whose majority of general partners or shareholders and directors are members of ICPAC; and are regulated by the board of ICPAC in its capacity as Regulatory Authority in the framework of the Prevention and Suppression of Money Laundering Activities Law, No.188 (I)/2007; and

III. A subsidiary company, either directly or indirectly, of any of the above persons;

“Subsidiary company” has the meaning as defined in articles 2 and 148 of the Companies’ Law Cap 113, as well as the meaning attributed to the term “subsidiary undertaking” in art. 1 and 2 of Directive 83/349 EEC and includes also any subsidiary of a subsidiary undertaking of an ultimate parent undertaking;

(Our comment 2: The Cyprus Bar Association has issued a directive in relation to subsidiary companies of Advocates, item iii. above, clarifying that it will regulate subsidiary companies of Advocates’ LLCs or general or limited legal partnerships or of an Advocate physical person, as identified under i., above, provided the subsidiary companies belong exclusively to them.

In effect, only if they are 100% subsidiaries of the said persons under i., above will be regulated by the Cyprus Bar Association and only in this case such companies will be treated as an Exempted company as per the Law. The interpretation to the notion of subsidiary given by the Cyprus Bar Association is a strict one and not in line with articles 2 and 148 of the Companies’ Law, Cap. 113, or the Law which makes specific reference to articles 2 and 148 of the Companies’ Law, Cap. 113 in identifying the meaning of subsidiary where a company is a subsidiary of another company if such other company holds more than 50% of its issued share capital and or otherwise controls it.

On the contrary, the Institute of Certified Public Accountants of Cyprus, (ICPAC), adopts the meaning of a subsidiary as this is identified in the Companies’ Law Cap 113, articles 2 and 148 and specifically adopted in the Law and requires that at least 50% of the board of directors must be Members of the Institute and hold a licence for the provision of administrative services, issued by the Institute and their Members outlined above control the majority of the votes in the company in accordance with the respective articles of association or partnership agreement.

In this way, there is a mismatch, a non-uniform approach as to the implementation of the same provision of the Law by the regulating bodies giving beneficial treatment to members of the Institute of Certified Public Accountants of Cyprus (ICPAC), in breach of the principle of equality as per the Constitution and also constituting a serious restraint of trade.

The interpretation given by the Institute of Certified Public Accountants of Cyprus seems to be correct and this should have been also followed by the Cyprus Bar Association).

“Real beneficiary” has the meaning attributed to it by article 2 of the Prevention and Suppression of Money Laundering Activities Law, No.188 (I)/2007, namely, for companies, is the physical person or persons who hold more than 25% of the share capital of the company or the physical person or persons who in any other way exercise control over the administration or management of the company;

“Persons who actually manage the Licenced person” mean the members of the board of directors of the Licenced person and its senior management;

(Our comment 3: The above definition, of who is actually managing the Licenced person, in combination with the relevant provision in the Law, art. 7, excludes the use of nominee directors in Licensed companies.

The directors of the Licenced person, either executive or non-executive or acting on shareholders’ instructions or not, are considered by the Law as among the persons who actually manage the company and, in this respect, must meet the qualifications defined in the Law and also bear the liabilities defined therein).

“Director” is the person who holds the position of a director in a company or who has the power to exercise substantially the same powers / authorities as those exercised by a director in a company and includes a person under whose instructions a director or the directors exercise their powers;

(Our comment 4: The Law adopts an extended and broad meaning of the concept of company director with the obvious aim to extend the number of persons that come under the provisions and regulation of the Law).

“Administrative services” mean the services regulated by the Law and defined further below;

“Trust” means the written legal arrangement where the settlor transfers property to one or more trustees who will hold it for the benefit of one or more beneficiaries and includes an international trust, as defined in the Cyprus International Trust Law, L.69(I)/1992 as amended;

“Trust Registries” means the trust registries kept by the Cyprus Securities and Exchange Commission, the Cyprus Bar Association and the Institute of Certified Public Accountants of Cyprus (ICPAC);

“Trustee” or “Fiduciary” means a person to whom specific property has been transferred to or has been granted in accordance with the provisions of a trust deed or a trust agreement, who will hold it for the benefit of one or more beneficiaries;

“Settlor” means a person who transfers or in any other way grants property to a trust;

“Investment services” means any of the services and activities, respectively, specified in Part I of the Third Appendix of the Investment Services and Activities and Regulated Markets Law, No. 144(I)/2007 as amended, relating to any of the financial instruments listed in Part III of the Third Appendix of the said law;

“Securities and Exchange Commission” or “Commission” means the legal entity of public law which is governed by the Cyprus Securities and Exchange Commission Law, No. 73(I)/2009 as amended;

"Investment Firm" or "IF" has the meaning attributed to this term by article 2 of the Investment Services and Activities and Regulated Markets Law, No. 144(I)/2007;

“Regulatory authorities” are the authorities which are defined by articles 59 of the Prevention and Suppression of Money laundering Activities Law, No.188 (I)/2007, indicatively the board of the Cyprus Bar Association for Advocates, the board of Certified Public Accountants of Cyprus (ICPAC), for auditors and accountants, the Central Bank of Cyprus for credit institutions and others as identified in the Law;

“Company” means a company incorporated under the Companies’ Law Cap 113 as amended;

“Management Company” has the meaning attributed to this term by article 2 of the Open-Ended Undertakings for Collective Investments Law, Law No. 78(I)/2012 (UCITS Law);

“Variable Capital Investment Company” has the meaning attributed to this term by article 6 of the UCITS Law;

“Limited partnership” has the meaning attributed to this term by the Partnerships and Business Names Law, Cap 116;

“Depositary” has the meaning attributed to this term by article 2 of the UCITS Law;

“Private company” has the meaning attributed to this term by article 29 of the Companies’ Law Cap 113;

“Cyprus Investment Firm” or “CIF” has the meaning attributed to this term by article 2 of the Investment Services and Activities and Regulated Markets Law No. 144(I)/2007 as amended;

“Compliance officer” means a compliance officer as defined in Sub-paragraph (a) of paragraph (1) of article 69 of the Prevention and Suppression of Money Laundering and Activities Law and paragraph 2 of Directive DI144-2007-08 of the Commission for the Prevention of Money Laundering and Terrorist Financing;

"Parent company" has the meaning attributed to it by articles 2 and 148 of Companies’ Law, Cap 113, as well as having the meaning attributed to the term “parent undertaking” by articles 1 and 2 of Directive 83/349/EEC on consolidated accounts;

“Register” means the Register established and maintained according to the provisions of the Law;

“Unit” means the Unit for the Prevention of Money Laundering offences established under the Prevention and Suppression of Money Laundering Activities Law, No.188 (I)/2007;

“Law” or “the Law” means the Law Regulating the Businesses Providing Administrative Services and Related Matters Law, No. 196(I)/2012 as amended and the Directives issued by the Commission pursuant to this Law;

“Directive DI144-2007-08” means the Commission’s Directive for the Prevention of Money Laundering and Terrorist Financing;

“Directives” means the Commission’s Directives of regulatory content, which are issued pursuant to the Law and are published in the Official Gazette of the Republic of Cyprus;

“General partnership” has the meaning attributed to this term by the Partnerships and Business Names Law, Cap 116;

“Client” means every person to whom administrative services are provided;

“Credit institution” means a bank and or a co-operative credit institution;

“Regulated market” means a regulated market as defined by article 2 of the Investment Services and Activities and Regulated Markets Law, No. 144(I)/2007 as amended;

“Co-operative credit institution” has the meaning attributed to the term by article 2 of the co-operative Societies’ Law, Law No.22/1985 as amended;

“Bank” has the meaning attributed to this term by article 2 of the Banking Law, No. 66(I)/1997 as amended;

“Financial instruments” means the instruments defined in article 2 of the Investment Services and Activities and Regulated Markets Law, No. 144(I)/2007 as amended.

C. APPLICABILITY OF THE LAW

The Law regulates and applies to persons who provide administrative services in or from Cyprus.

C.I. Persons exempted from the applicability of the Law

The following persons are fully exempted from the applicability of the Law:

a. The Exempted persons, namely, Licenced advocates, auditors and accountants members of ICPAC, their legal or accounting firms and their subsidiary companies as defined above;

b. CIFs, and credit institutions e.g. Banks and co-operative societies who exercise administrative services within the framework of their business

c. Physical persons who are employed by the above persons if they exercise such administrative services within the scope of their employment;

d. UCITS Management Companies and UCITS Variable Capital Investment Companies, that provide administrative services during the course of their business under the UCITS Law, are also exempted from the scope of the Law.

The persons identified under paragraphs C.I. a) and b) above, if they wish, they may elect to submit an application to obtain a Licence from the Commission. In such a case, such persons will be regulated by the Commission and not by their respective regulatory authorities.

A legal person exclusively owned by a Licenced person and not by an Exempted person, is not subject to the provisions of the Law; the responsibility for the actions undertaken by the said legal person under the Law is borne by the Licenced person; in such cases the Licenced person should notify the Commission immediately, and without delay of the existence of such legal persons.

(Our comment 5: A legal person exclusively owned by a Licenced person, namely, 100% subsidiary companies of Licensed persons are not subject to the provisions of the Law. ONLY if they are 100% (exclusively) owned by the Licensed persons will not be subject to the provisions of the Law, while subsidiary companies of Exempted persons, are not subject to the provisions of the Law, if they are subsidiaries as per the provisions of articles 2 and 148 of the Companies’ Law Cap. 113.

As per articles 2 and 148 of the Companies’ Law Cap. 113, a company is a subsidiary of another company if such other company holds more than 50% of its issued share capital and or otherwise controls it. There is no need to hold 100% of its share capital to be a subsidiary under these incorporated in the Law articles.

By demanding a 100% participation in subsidiaries of Licenced persons, while the same is not demanded for Exempted persons, the Law imposes discriminatory treatment between Licenced persons and Exempted persons in breach of the principle of equality as per the Constitution).

The provision of administrative services by an employee of a Licenced person or by a third person following outsourcing is considered as provision of administrative services by the actual Licenced person itself. The issues related to outsourcing will be discussed further below.

(Our comment 6: In effect, when 100% subsidiaries of Licenced companies, exclusively owned by them, offer administrative services, these services are considered to be offered by their Licenced parent companies which Parent companies bear also the relevant liabilities.

Such 100% subsidiary companies do not need a Licence pursuant to the provisions of the Law. Licenced companies may also outsource the provision of administrative services to third persons not being their employees, either physical persons or legal persons and these third persons are not obliged to receive a Licence pursuant to the provisions of the Law.

The outsourcing of the services though may be made only to persons residing in Cyprus as will be seen further below and to physical or legal persons provided certain conditions are met as per article 4 of the Law.

Also, in this case, the administrative services are considered as services offered by the Licenced persons and not by the third persons.

The Law does not give a definition for the term “third persons”. We assume though that it applies both to physical and legal persons).

C.II. Provision of trustee services

Any person providing trustee services, administers and manages trusts, must collect and have at all times available in Cyprus for disclosure to the relevant Regulatory Authority the following information, where applicable: