Looking at the domiciles of foreign exchange (forex) brokers, you might be struck by how many of them have decided to set up shop in Cyprus, an island nation perhaps better known for holidaymakers sunning themselves on the beaches of the Mediterranean.
Since the Cyprus Securities and Exchange Commission (CySEC) issued its very first forex brokerage licence to Windsor Brokers in 1988, the country has seen an explosion in forex firms taking up residence, with over 40 now domiciled on the island.
These include famous names such as Markets.com and FXTM, who have decided to establish themselves in Cyprus as opposed to what some may think was a more natural home in the City of London.
But why is this seemingly quiet island the mainstay of all things forex?
One of the answers lies in the ever-present issue of taxes, or in this case the lack thereof, with Cyprus having one of the lowest corporate tax rates in the world at just 12.5%, well below the UK’s own rate of 19%.
The country is also a member of the European Union (EU), the European Economic Area (EEA) and subject to the Markets In Financial Instruments Directive (MiFID), an EU law designed to ensure a minimum regulatory framework for finance products across all EEA countries.
However, the more important element of MiFID is the “passporting principle”, which allows a firm in any EEA country to offer its services to customers in another.
Countries that have currently implemented MiFID in full include Ireland, the UK, France, Germany and Cyprus.
In short, this means a brokerage can pay Cypriot corporation tax while still being able to sell its services to customers in the UK market, a practice that many have been keen to take advantage of.
Cyprus has also grown into one of Europe’s more prominent finance hubs; it is one of the 100 biggest financial centres globally, and as such has attracted a specialised workforce of advisors, compliance experts and risk managers, all vital employees for a forex trading outfit.
Crypto the next forex?
Forex isn’t the only industry seeking to take advantage of the passporting principle and low taxes and Cyprus is not the only country to offer those benefits.
Cryptocurrency and Blockchain firms, while still at a fairly embryonic stage of development, have already found a home in jurisdictions which, like Cyprus, offer access to Europe’s finance markets.
The most famous is perhaps the British Overseas Territory of Gibraltar, which has not only legalised and regulated the operation of crypto exchanges but also subjects them to a very business-friendly corporate tax rate of just 10%.
As an added sweetener, cryptocurrencies are also not subject to any form of capital gains or dividend tax.
The favourable regime hasn’t taken long to draw in companies involved in the sector, with NEX-listed blockchain investment and advisory group Coinsilium Group Limited (LON:COIN) having already made preparations to move its business to the territory.
Aside from Gibraltar, Malta is another jurisdiction attempting to make itself the ‘go-to’ locale for the industry, having also legalised crypto exchanges and introduced legislation regulate initial coin offerings (ICOs), brokers, advisers and asset managers in the sector.
Much like Cyprus, Malta is an EU member state and has the advantages of MiFID; it also does not have any specific cryptocurrency tax laws and VAT does not apply to transactions that exchange fiat currency for crypto.
If the sector becomes as big as its proponents are suggesting, it might not be long before Cyprus isn’t the only spot in the Med serving as a haven for companies seeking an easy and cheaper route into Europe’s financial markets.