10-12-2012

Penetrating Cyprus Insurance Market On The Basis Of The“Single European Passport”

Authors

  • Αndreas Haviaras, Attorney at law
    Managing Partner at Haviaras & Philippou LLC

In this presentation we assume that an EU life Insurance company (the “Company”) offering single premium unit-linked whole-of-life assurance policies has notified its local authorities of its intention to operate in the Cyprus market. We attempt herein below to present the relevant legislation by replying a number of the questions designed to provide sufficient information to any such entity interested to take an informed decision as to whether to develop a compliant insurance product to be offered to Cyprus resident clients.

Can the Company operate on Cyprus territory (offering insurance policies to Cyprus resident clients in Cyprus) without obtaining any further license from the Cyprus authorities?

According to section 35 of the law regulating the Insurance Business in Cyprus No 35(1)/2002 as amended, the Company may carry out insurance business in Cyprus under the regime of freedom of providing services (“FOS”) subject to fulfilling the following conditions:

  1. The Place of Origin Superintendent of Insurance (“POSI”) shall forward to the Cyprus Superintendent of Insurance (“CSI”) the appropriate documentation and
  2. The Company shall appoint in Cyprus a Tax Representative for the purposes of section 137 of the Law.

The CSI shall communicate in writing to POSI that the Company was placed on the register kept for the insurance companies activated under the FOS regime but may ask from the POSI information as to the special sale systems the Company may use in Cyprus. The Company may commence insurance business in Cyprus under the FOS regime as soon as it receives confirmation for such freedom from POSI.

Are there regulatory restrictions on Cyprus based intermediaries who wish to sell Company policies locally?

The Law provides for five registries for insurance intermediaries. Nobody is permitted to sell insurance business unless he is recorded in one of these registries and then only to the extend allowed by sections 164 – 171 of the Law.The registries are for insurance agents, insurance brokers, insurance consultants,.insurance intermediaries and employees of insurance companies, banks and cooperative societies. Therefore the Company may enter into arrangements with licensed insurance agents and insurance consultants. The Company will need to sign insurance agreements with them which will need to comply with the provisions of section 179 of the Law and the said agreements will come into force on the day the CSI will record the name of the agent/ consultant in the appropriate registry as agent/consultant for the Company.

There are no rules preventing Cyprus residents from concluding insurance contracts with the Company.

Are there any reporting requirements for the Company or domestic intermediaries when offering policies to Cyprus residents?

The Tax representative (which the Company will need to appoint pursuant to the provisions of section 137 of the Law) is obliged to file to the Department of Inland Revenue a statement of payment of the taxes in respect of the business concluded and the other charges of the last quarter of the previous year as well as a complete list of the insurance policies issued by the Company. There are no reporting requirements for Cyprus residents purchasing the Company insurance policy. As an exception to this, a Cypriot who is invited by the Department of Inland Revenue to file a capital statement pursuant to the Income Tax Law provisions,will need to disclose the existence of such policy as part of his overall property.

Can a Cyprus resident acquire a policy from the Company, which is subject to foreign law?

The question is regulated by section 131(1) of the Law .If the insurance obligation is within Cyprus then the insurance policy is regulated by the laws of Cyprus unless the policy explicitly provides otherwise. Therefore the policy may explicitly provide that it is regulated by the laws of another EU jurisdiction. The provisions of section 131(1) cannot defeat those of the provisions of Cyprus law which are compulsory and this independently from the law which according to those provisions would be applicable on the policy. Therefore, if for example a person domiciled in Cyprus who has children is insured by the Company under a policy regulated by the laws of England and Wales and the policy provides that the beneficiaries of the policy are the insured’s pets this would not be accepted as under the Cyprus Inheritance law there is a compulsory provision whereby a certain portion of the deceased’s property compulsorily passes to his legal heirs. There are mandatory provisions in the Law which is dealt with in other questions in this questionnaire. Apart from that, policies issued by the Company to persons domiciled in Cyprus may be affected by the provisions of the Wills and Succession Law Cap 195 as amended (“Cap 195”). If the life assured dies domiciled in Cyprus, the succession to deceased’s movable property, wherever situated, is compulsorily governed by the laws of Cyprus. In particular the disposable portion is protected for the benefit of the legal heirs.

Does Cyprus insurance contract law require that the contract be written in a particular language?

Under section 126 of the Law the policy may be expressed,instead of the official language of Cyprus, in any other official language of the European Union provided that this is asked for by the policy owner in writing and provided that the policy owner has a choice as to the applicable law regulating the policy.

Does Cyprus law place restrictions on who can be the life assured and what is the minimum age of the life assured?

The capacity to contract is regulated by section 11 of the Contract law Cap 149 (“Cap 149”). Section 11 of Cap 149 specifies that a person is capable to contract if is of sound mind, he/she is not disqualified from contracting by any law and has attained the age of 18 years. Cap 149 further provides that the law applicable in England (we are a British colony till 1960) as to the contracting powers of persons under 18 years of age are applicable in Cyprus. Cap 149 further provides that a married person is not deemed to be incapable to contract merely because it is of less than 18 years old. The life assured must be a person/entity that has insurable interest on the life assured. The criteria, as to who has and why he has insurable interest for a certain life, are the same as those applicable under the Laws of England and Wales.

Does Cyprus law require proof of insurable interest?

Βy virtue of the provisions of s. 29(l)(b) of the Courts of Justice Law (14/60) all the Courts apply (1) The Constitution of the Republic, (2) The laws which have been retained by virtue of Article 188 of the Constitution, (3) The principles of Common Law and Equity, and (4) The English Laws which were applicable in Cyprus before 1960. The English Life Assurance Act 1774 was applicable in the then Cyprus colony and by virtue of that Act there is need to prove the existence of insurable interest. Even if that Act was not applicable I believe that by operation of sections 23(e) (which declares immoral contracts void) and 30 (which declares wager contracts void) of Cap 149 there can be no valid insurance contract unless there is proof of insurable interest.

Does Cyprus law require the nomination of a beneficiary?

The Law is silent on the point however by operation of Cap 195 when a person domiciled in Cyprus dies and he has left no valid will, his entire estate passes to his/her legal heirs.

Are there rules on insurance advertisements and other promotional activities, which would apply to the Company?

By virtue of section 141 of the Law the provisions of sections 138 to 140 of the Law (which regulate the insurance advertisements) and the corresponding provisions in the Regulations are applicable to the Company. Basically the advertisement must be explicit and not confusing and not to attempt comparisons unless the comparison is not confusing and is objective. The SCI may intervene if the advertisement is not in compliance with the above provisions.

When selling its policies to Cyprus-resident individuals, would the Company need to disclose to the client the charges (e.g. for fund management) applicable to either any Company internal linked fund to which the policy was linked; or. any fund external to Company, whether publicly available or not, to which the policy was linked.

In both cases by virtue of section 127 and regulation 21 to 32 the Company will need to give the said information.

Does Cyprus have forced inheritance rules?

Yes, there are compulsory inheritance provisions. The right of succession is regulated by Cap 195. A person has the right to make a will however he can dispose through it only the disposable portion and no more. The disposable portion is fixed by sections 41 and 42 of Cap 195.

Would the appointment of beneficiaries defeat any such forced inheritance rules?

The appointment of beneficiaries cannot defeat the aforesaid compulsory inheritance rules. However if the policy holder names in the policy a third person to be the beneficiary and does that as security for a debt or other obligation the rights of the beneficiary prevail over those of the heirs.

Is a life insurance policy subject to any premium, income, capital gains or other tax in Cyprus while in force?

The insurance company will be subject to stamp duty upon inception or renewal of the policy but apart from that, no tax implications will arise for the insurance company in Cyprus. In relation to the policyholder, it should be noted no tax implications will arise in Cyprus at that level while the policy is in force. In fact, and in the event of a life insurance policy where the policy holder is the same as the life-assured up to 100% of life insurance premiums can be subtracted as a personal allowance from taxable income. However, this deduction cannot exceed 7% of the sum assured and furthermore the sum of the contributions to the Social Security Fund or to an approved Pension or Provident Fund, the life insurance premiums and the contributions made under the General Health Scheme Law or under any approved medical scheme cannot exceed 1/6 of chargeable income before such deductions.

What is the tax treatment should the policyholder surrender the policy in part or in whole?

If the policy holder wishes to surrender the life insurance policy within three years from the date of such policy there shall be added to the income of such individual thirty per cent (30%) of the premiums for which a deduction had been allowed under the provisions of this section, and twenty per cent (20%) of such premiums if the surrender takes place within the fourth, fifth and sixth year from the date of the insurance policy. Regular withdrawals or even ad hoc single withdrawals will be treated as partial surrenders of the policy and the tax authorities will add on the income the proportional amount of the premium that was deducted. Following the expiry of the 6 year period, no premiums shall be added back to the policyholder’s taxable income and as such result in zero tax. Any withdrawal or surrender occurring after the sixth year of the policy shall not have any tax consequences. Please note that there is no difference in treatment between withdrawal (redemption) of capital and receipt of investment gains. Funds payable due to a life insurance policy are completely exempt from tax in two cases:

  • Following the expiration of 6 years from the inception of the policy, cancellation or surrender in whole or in part does not trigger tax.
  • The payment of the policy to the beneficiary following the death of the life assured is exempt from tax.

Is the payment to the beneficiaries of the policy, upon death of the last life assured, subject to income, gift/inheritance or other tax in Cyprus (assuming that the payment is made to a Cyprus tax-resident beneficiary)?

According to Cyprus Income Tax Laws, any lump sum received by way of retiring gratuity, commutation of pension, death gratuity or as consolidated compensation for death or bodily injury will be exempt from tax. Therefore, the payment of the life-insurance beneficiaries, will not trigger any tax implications in Cyprus even if death (and hence the payment of the life-insurance) occurs prior to the expiration of the six year period mentioned above.

What is the tax treatment if the policy is held by foreign trust (i.e. the trustee(s) being the policyholder and the Cyprus-resident client being the economical beneficial owner)?

There will be no difference in treatment from the case where the economical beneficial owner holds the policy directly and any returns will be taxed in the same manner as described above provided that the trust is declared to the Inland Revenue.

Are there any specific investment restrictions applicable to life insurance contracts that we should respect (e.g. for tax efficiency or any other purpose)? In particular, the Place of Origin regulator establishes certain restrictions on admissible underlying assets. Are such restrictions likely to be respected in Cyprus? (a copy of these restrictions can be obtained from us.)

For tax purposes, no restrictions are posed apart from the fact that the policy should have a life insurance element in order to be allowed the deductions as explained above. In terms of the Law (specifically sections 76-86), specific directions as to what is an “Approved Investment” are issued by the Minister of Finance and published in the Official Gazette of the Republic from time to time. These Directions for Approved Investments” may be revised whenever the Minister of Finance deems appropriate and they determine. The Directions for Approved Investments that are issued according to the aforesaid rules, may not impose on the insurance companies the obligation to place assets in a specific category of approved investments, but they may provide for rules on evaluating the assets included in the approved investments as well as any other criteria and conditions for the enhancement of the operation of the insurance market and the stock market. The provisions as to the Approved investments are pursuant to the provisions of section 85 of the Law pro rata applicable to non-resident insurance companies operating in Cyprus. The Law further poses restrictions on investments in UCITS and other Open-end Collective Investment Organizations investment vehicles; namely Life insurance companies must ensure that its technical reserves covering these benefits are represented as closely as possible by those units or if there are no units, by those assets. Every Cyprus insurance company that offers Life Class policies, the benefits of which are directly linked to a share index or to another unit of reference, other than those mentioned above, must ensure that its technical reserves covering these benefits are represented as closely as possible by the units, deemed to represent the reference value or, if there are no units, by the assets of appropriate security and liquidity and which correspond as closely as possible with those on which the particular reference value is based.

Would the Company be required to appoint a fiscal representative in Cyprus?

Yes the Company must appoint one.The Tax representative is appointed pursuant to section 35 of the Law prior to the beginning of business in Cyprus. The Tax representative is obliged to file to the Department of Inland Revenue a statement of payment of the taxes (provided for by section 136 of the Law) in respect of the business concluded and the other charges of the last quarter of the previous year as well as a complete list of the insurance policies issued by the Company. If there is no compliance with this provision the CSI may revoke the entering of the Company in the special registry of the insurance companies offering insurance business under the regime of freedom of providing services

Are there any reporting requirements for foreign insurers, domestic intermediaries or Cyprus-resident clients at the inception of the insurance contract, while it is in force or upon payments of benefits to policyholders/beneficiaries?

Yes, section 127 and regulations 21 to 32 do set forth the reporting requirements for the Company at the inception of the insurance contract, while it is in force and upon payments of benefits to policyholders/beneficiaries.

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