Establishing a new forex business brings with it a long series of critical decisions and risky choices. Each decision you make affects both the initial amount of capital needed to begin operations, as well as the type of clients that you will attract. One of the major things every broker has to consider is where to incorporate his brokerage.
For the purposes of the question at hand, we will make a distinction between your base of operations and your place of incorporation, which doesn’t have to be the same place. This is since choosing the location of your operational headquarters or your executive offices involves a whole different set of considerations, such as costs of rent, rates and quality of employees, property tax, etc. In this article, we will focus on the legal and bureaucratic aspects of different jurisdictions.
Among the things to consider when looking for your place of incorporation, are the complexity involved in acquiring a license, the estimated time it would take, tax laws and double taxation rules in your country of residence, and of course the initial payment and the annual fees of licensing and operation in this country.
Although each and every country in the world has its own legal framework, one can generally group the popular forex brokerage jurisdictions into 2 major categories: Prestige locations and Offshore options. The first group consists of usually established economies, with a high GDP and a reputable business environment, such as the UK, US, and Australia.
The Prestige Option
“The advantages of having a license in a prestige location are manifold”, says Misha Kogan, EMEA Region Sales Manager at Leverate, a leading brokerage solutions provider. “It starts from the high level of trust you get from traders and your appeal to a more lucrative and affluent client base. It continues with how easy it becomes for you to secure a bank account for your brokerage, as well as Payment Service Providers. You can also expect to get reduced fees from them, since being established in such locations is associated with lower risk”.
However, obtaining a brokerage license in these countries would require a minimum Net Capital which is out of reach for most new brokers. A currency trading license in the UK or Japan can cost as much as 10 times higher than in a comparable offshore destination. But there also some mid-budget options available which are no less esteemed. Let’s take a look at the two most popular countries.
In recent years Cyprus has become the island of choice for forex businesses, due to its EU membership which grants its companies the ability to offer their services to all member states in the European Economic Zone. Combine this with low corporate taxes, a booming financial sector, and a skilled workforce, and you get the perfect place to set your foot in the FX world. The costs of a Cyprus Investment Firm License range between €40,000-€100,000 and the entire process takes about 6 months to complete.
A rising contender to Cyprus within the EU is another sun-drenched Mediterranean destination. Malta has become an established business environment for FX businesses, due to a reliable regulatory framework. Malta’s Financial Services Authority offers 2 types of licenses for Forex brokers: Category 2 for risk-free managers, and Category 3 for businesses who trade with their own account. Initial Capital requirements are the same for both categories at €730,000, but the application and license fees would be cheaper for Category 2 at €1,500-€3,000.
The Cheaper Option
Brokers with less capital or with different preferences can choose to incorporate their company in an offshore location, which usually have lower initial capital requirements.
“Incorporating your brokerage in an offshore location definitely has its benefits in terms of lower expenses and more lenient regulatory demands”, says Mr. Kogan, “But you should also expect to face problems with finding a good bank or a PSP that will accept you. The lack of business credence can also be reflected in difficulty to attract certain classes of traders, as well as potential business partnerships”.
However, if you choose to go the offshore way, there is no shortage of places to incorporate. From the British Virgin Islands and St. Vincent in the Caribbean, all the way to far-flung pacific destinations such as Marshall Islands and Vanuatu. Below are two popular jurisdictions for forex brokers.
For many people, this island nation in the Indian Ocean is the epitome of a dreamlike romantic getaway. But in recent years, it has also been drawing more business-minded crowds. With a 1.5% income tax rate for global companies, Seychelles is an emerging low-cost solution for Forex start-ups. New brokerages can obtain a Special License Company in no more than 4-12 weeks. Application fee is extremely low at $200, and the license fee itself is $1000 annually.
You can register your company in Seychelles for free if you don’t have an active office there, but that would prevent you from signing up with local banks and Payment Service Providers.
Another exotic travel destination in the Indian Ocean, Mauritius offers brokers an appealing tax system, with corporate taxes of 3% for worldwide businesses. Minimum Net Capital requirements amount to no more than 20,000$ – some of the cheapest available. License acquisition takes somewhere around 4-5 months and is a fairly simple procedure. Applications are submitted to the FSC along with the necessary documents. Fees vary according to your business model – for instance, Investment Dealers (Brokers) pay 500$ application fee and 1,750$ annual license fee.
Changing Your Jurisdiction
An important question that many beginning brokers ask is whether you can change your forex brokerage jurisdiction later on in your business life cycle.
“Changing your business jurisdiction is definitely possible, and it’s a great choice for brokers who are on the fence”, says Mr. Kogan. “You might decide to start your Forex business in a region with lower total costs, including incorporation fees, regulatory charges, Net Cap requirements, and staffing. You can then focus on growing your business, and once your brokerage has gained an active client base and you have begun to realize profits, you can switch to a prestige jurisdiction to tap into that lucrative clientele”.
First published in Finance Magnates