CYPRUS: An Introduction

Cyprus Overview 

Cyprus’ advantages as a business location stem from its geographical position, its EU and Eurozone membership and its population. Situated at the eastern end of the Mediterranean, it is ideally positioned to act as a conduit for investment both into and out of the EU. It enjoys good commercial ties with Africa, Asia, the Middle East, the Far East and Europe and thus provides a natural strategic hub for commercial activities in the region. The Cyprus economy is dominated by the services sector which accounts for over 80% of GDP. Key components of this are finance, real estate, shipping and tourism. 

The country has a modern infrastructure which includes a comprehensive road network, extensive port facilities and two airports. A high value is placed on education with 6.4% of GDP allocated to this sphere producing a highly educated and largely multi-lingual workforce. The official languages are Greek and Turkish, but English is widely spoken and used extensively in commerce and in government. Culturally, the island leans towards Greece and Western Europe but there also strong historic links to the Middle East, Britain and, via the Orthodox Church, to Russia.

Cyprus’ legal system is based on English Common Law principles and it is fully compliant with the EU, the FATF, OECD, FATCA, Financial Stability Forum laws and EU AML Directives. Accounting is in accordance with International Financial Reporting Standards.

Economy and business environment 

Cyprus boasts an open, vibrant and growing economy which is welcoming of foreign investment and foreign investors. It is generally regarded as business friendly and ensures transparency and reliability in business practices. A specific advantage is its modern and simple tax framework which is fully compliant with EU and OECD standards and offers one of the lowest tax rates in the EU. The current corporation tax rate is 12.5% and it is possible for this to be reduced, under its IP Box regime, to as little as 2.5%. Several other practices such as Notional Interest Deduction on equity investment also exist to try to stimulate equity investment in start-ups. There is a complete participation exemption and no taxation of capital gains except gains arising from the disposal of real estate in Cyprus. Interposing a Cyprus holding or finance structure can significantly reduce the tax burden and provide tax-efficient exit options.

Cyprus also offers the most competitive, flexible and fully approved shipping tonnage tax system in the EU. The shipping sector accounts for 7% of GDP and Cyprus is the largest shipping management centre in the EU. It also has the 11th largest merchant fleet in the world. There are double taxation treaties in place with more than 64 countries including all EU countries (other than Croatia), Russia, China, India and the USA.

Cyprus’ investment programme offers a route to Cyprus and hence EU citizenship for investors of good character. The due diligence aspect of the programme had been criticised by the EU, but amendments have been made and the updated programme has EU approval. Investment into Cyprus, as a result of the scheme, has been a key factor in the revitalisation of the construction and real estate sectors.

All the above advantages, coupled with the benefits of island living, render Cyprus a particularly attractive location for holding companies, regional headquarters, shipping concerns and more recently, since the 2018 enhancements to the law on alternative investment funds (“AIFs”) took effect, funds and fund managers.

The tourism sector remains a strong component of GDP and a long-term strategy is in place to reduce its seasonality by focusing on new niche markets and offering higher quality products.

The IMF predicts GDP growth of 3.3% in 2019 and the managing director of the European Stability Mechanism has recently described Cyprus as being one of the best performers in the Eurozone.

Recent Developments 

The government focus remains on securing Cyprus economic recovery, attracting inward investment and promoting Cyprus as a bona fide modern international financial centre.

During 2019 legislation was approved implementing the EU anti-tax avoidance directive (2016/1164) thereby underlining the government’s commitment to supporting international efforts to tackle tax avoidance. Following the transposition of the anti-money laundering directive EU 2015/849 into Cyprus jurisdiction Law 13(1)/2018 preparations are in hand to establish a register of the ultimate beneficial owners (“UBO”) for every company and legal entity. The Department of the Registrar of Companies will have jurisdiction over the register and it will be in place by January 2020 coinciding with the transposition of 5th AML Directive. The Cyprus Securities and Exchange Commission has undertaken to establish the UBO register for trusts by March 2020.

New double taxation agreements with Kazakhstan, the Netherlands and Egypt have been signed. The agreement further cements Cyprus’ status as a legitimate low tax jurisdiction.

The government is aiming to attract more business and investment into the information and communications technology centre. It has pledged to double its expenditure on the sector and to take measures to also boost private investment. It is also seeking to improve the licensing procedure for large investments by significantly reducing the time taken to obtain approval via the introduction of an effective one-stop shop procedure. An appropriate bill is expected to be introduced in 2020.

Established in March 2018, the Deputy Ministry for Shipping is now fully operational providing a 24/7 service to the industry. It has modernised and simplified many registrations and reporting procedures as well as its fees and dues regulation. Maintaining White Flag status for both the Paris MOU and the Tokyo MOU is a priority as is extending the tonnage taxation system for a further 10 years. It has recently introduced a funding scheme to encourage upgrading of registered vessels. The sector has also announced that it is ready to embrace distributed ledger accounting practices in line with other major shipping nations.

The AIFs sector has seen significant growth in terms of value of assets under management and in terms of numbers of fund managers and funds since June 2018. At 30 June 2019 there were 42 authorised AIFs, 119 authorised AIFs with limited numbers of persons and 18 registered AIFs in Cyprus. Approximately EUR6.8 billion of assets were under management at the same date. Further growth is anticipated.

The ECB’s negative interest rate policy has created challenges for the banking sector which has a liquidity level of around EUR14 billion. Following the 2013 crash, levels of commercial and domestic debt remain high as do NPLs. Consequently, banks are having difficulty in reducing their deposits via the traditional route of making loans. The cost of holding liquid funds is impacting the profitability and hence negatively impacting the balance sheets of the two major banks. A rationalisation of the banking sector has begun which is targeting cost reduction and improved revenue generation. This manifesting itself in branch closures, redundancies and measures designed to encourage customers to conduct the majority of business online. The two main banks hope to retain their large deposit customers by offering alternate low risk investment products. There is, however, concern that some deposit holders may look to riskier investments in order to obtain a higher level of return.

A first hydrocarbon exploitation licence has now been granted to the consortium owning the Aphrodite concession further bolstering Cyprus’ hopes of becoming a regional energy hub, and Cyprus, Greece and Israel have entered into an agreement for the construction of the EastMed pipeline to transport gas to Europe.

Phase one of the introduction of a National Health Scheme has been implemented. This is likely to have a negative impact on the private health insurance sector although the medical and health sector sees opportunities in the field of medical tourism.

Future prospects 

The prospects for Cyprus are good. It has presented a balanced budget for 2020 and the government is on track for early repayment of its loan to the IMF. GDP growth in 2020 is expected to remain robust. The government and the business sector are committed to offering a competitive and fully regulated business and tax environment.

The introduction of economic substance rules offers an opportunity to attract holding companies and shipping concerns currently resident in zero tax havens to a legitimate low tax location. It is hoped that the UBO regime will do likewise. In the medium term the opportunity to exploit gas deposits and to build a regional energy hub remain. A ‘no deal Brexit’ will, if it takes place, bring consequences for Cyprus since the UK is a major trading partner and contributes significantly to tourist income. There is a political will for the two countries to continue to work together in the long term. Companies headquartered in the UK wishing to retain a foothold in the EU may seek to relocate within Europe. Cyprus offers the advantages of a familiar legal system, low taxes and few language difficulties.