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CYPRUS: An Introduction

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Despite being among the world’s smallest nations, Cyprus has developed into one of its most important and highly regarded financial and business centres. Located at the crossroads of Europe, Asia and Africa, at the centre of the shipping and air routes linking Europe with the Middle East, the Far East and Africa, Cyprus is a strategic hub for business activities in the region.

The Country 

Cyprus is a member of the EU and the Eurozone. It is in the Eastern European time zone, two hours ahead of GMT, seven hours ahead of New York and seven hours behind Tokyo. The island enjoys a Mediterranean climate and the quality of life is among the highest in the world. The population and workforce are highly educated, and Cyprus is a world leader in terms of university degree holders as a percentage of the population. English is widely spoken and extensively used in commerce and government.

The Business Environment 

For many years Cyprus has been an excellent location for holding companies, for a host of reasons, including its transparent and reliable legal system, excellent communications and world-class professional and financial services. Since joining the EU, Cyprus has consolidated its position as the main portal for investment between the EU and other Western economies on the one hand, and the dynamic markets of Russia, Central and Eastern Europe, India and China on the other.

Cyprus’s modern, simple tax system is a particular source of competitive advantage. It is fully compliant with EU and OECD standards and tax rates are among the lowest in the EU. There are double taxation agreements covering more than 60 countries. There is a complete participation exemption and no taxation of capital gains except gains arising from real estate in Cyprus. Reorganisations and cross-border mergers are tax-exempt. Interposing a Cyprus holding or finance structure between investors in one country and the operating investee company in another can significantly reduce the tax burden, increasing post-tax income by 10% or more, and provide tax-efficient exit options.

With the world’s tenth largest fleet in terms of registered tonnage, Cyprus is also home to myriad shipping and ship management companies. Its tonnage tax system significantly reduces the tax burden on international shipping and ship management companies and makes Cyprus one of the most attractive environments in the world for international shipping.

Cyprus’s investment programme enables individuals who hold a residence permit for six months or longer to obtain Cypriot citizenship by meeting specified investment criteria. Applicants must have a clean criminal record, own a residence in Cyprus and must invest EUR2 million or more in Cyprus or be the owner or a substantial shareholder of a company doing business in Cyprus. Since Cyprus is an EU member, Cypriot citizenship considerably simplifies international travel and visa requirements and is proving attractive to high net worth individuals.

The Legal Environment 

Cyprus has a well-developed, transparent and reliable legal system based on common law. There is an independent and respected judiciary. Litigation can be protracted and time-consuming but effective interim remedies are available.

Recent Developments 

The government has pressed ahead with its programme to support economic recovery, attract inward investment and boost Cyprus’s attractiveness as a competitive international financial centre of the highest standing.

In December, new tax incentives were introduced for film and audio-visual production companies.

The network of double taxation agreements continues to grow: new agreements with Luxembourg and the United Kingdom are now in force and new agreements have also been signed with Andorra and Saudi Arabia.

One of the most important recent developments regarding double taxation is the postponement of the introduction of source-based taxation of capital gains on shares in “property-rich” Russian companies. Under the double taxation agreement between Cyprus and Russia, gains on disposals of shares are taxable only in the country of residence of the person disposing of the shares. Since Cyprus does not impose any capital gains tax on disposals of shares in companies unless they own immovable property in Cyprus, this makes Cyprus a very advantageous location for holding shares in Russian companies. These arrangements were due to change in 2017, with gains on the disposal of shares in companies which derive their value principally from immovable property in Russia becoming subject to tax in Russia. However, the Russian government has agreed to postpone the application of this provision, and all disposals of shares will continue to be taxable only in the country of residence of the person disposing of the shares.

In the summer of 2018 a package of legislative measures was enacted to strengthen the legal framework for resolving non-performing loans and to facilitate the disposal of loans, including a new law creating a framework for debt securitisation under the supervision of the Central Bank of Cyprus.

A new law on alternative investment funds took effect on 30 July 2018. It introduces a new form of alternative investment fund for professional or well-informed investors, known as the registered AIF, with the aim of reducing the time and cost involved in establishing an AIF in Cyprus. RAIFs which are externally managed by an AIF Manager established in an EU Member State do not require authorisation from the Cyprus Securities and Exchange Commission (CySEC) to operate in Cyprus; they are merely required to notify CySEC, which will maintain a register of RAIFs. Supervision will be only at the level of the AIF Manager. The RAIF structure offers great flexibility: there is no minimum capital requirement and RAIFs may be open- or closed-ended and stand-alone or with an umbrella structure. They may take the form of a mutual fund, an investment company with fixed or variable capital, or a limited partnership, and the new law introduces the concept of limited partnerships with separate legal personality. The new law also introduces a highly beneficial scheme for taxation of carried interest on funds.

Prospects for the future 

Cyprus has emerged successfully from its formal programme of economic reform and modernisation, with the targets agreed with international lenders having been met and in some cases exceeded. The reforms made at the behest of international creditors will improve regulation and keep out undesirable practices, and so help to enhance Cyprus's reputation for transparency and reliability and its attractiveness to reputable investors. The government and the business services sector are committed to offering a competitive tax and business environment of the highest standards of probity.

Overseas confidence in Cyprus as an international finance sector was undamaged by the economic crisis, and privatisation and disposal of distressed assets by banks and others are currently providing significant investment activity and opportunities in the domestic market.

The government is continuing with economic reform, in order to secure and consolidate the progress made to date. The international services sector is in a strong position to lead the recovery, with new, competitive offerings enhancing the benefits it provides to international investors.

Looking forward, the discovery of substantial gas deposits offshore Cyprus and the development of the island as a regional energy hub west of the Suez Canal offer substantial opportunities and grounds for optimism regarding the medium term.

While there are undoubtedly challenges ahead, the economy is growing well and businesses are looking forward with confidence. In summary, Cyprus is very much open for business.