CYPRUS: An Introduction to General Business Law
Current Economic Conditions
The Cypriot economy is known for its ability to recover from times of distress, evidenced from the successful recovery of the 2009–13 financial crisis and the 2020 global pandemic. Cyprus has just now received an upgrade from Fitch to ‘BBB’ with a stable outlook indicating perhaps once more its ability to face challenges such as the war in Ukraine and the worst global inflation in years. According to the European Commission, the economic reaction among consumers and businesses slightly improved in January 2023. The improved economic outlook is expected to further support tourism, which is anticipated to almost reach the 2019-level despite the restriction on the Russian market. The increasing interest rates are set to negatively affect corporate investments and residential construction with the hope that the 50% wage indexation, implemented in January 2023, could somehow support purchasing power. Elevated prices and tightening monetary policy are expected to weigh on real GDP growth, which is forecast to slow down to 1.6% in 2023, before accelerating to 2.1% in 2024.
Cyprus and Russia had developed very strong links before the war. The countries had concluded a large number of bilateral agreements which covered different areas (political, economic, commercial, cultural, legal, etc), including a joint declaration aimed at enhancing bilateral cooperation as well as a double tax treat, leading to a huge influx of cash and capital in Cyprus from Russian businesses. It was therefore inevitable that the EU sanctions imposed on Russia would have an impact on the Cypriot economy, particularly in the professional services sector and tourism.
Activity, Trends and Developments
Due to the need for adaptation brought by the pandemic and the war in Ukraine we have seen a considerable need for corporate restructuring of Russian owned groups with Cypriot companies in their structures, relocation of overseas businesses particularly from Russia and Ukraine to Cyprus as well as relocation of individuals. Law firms and other firms in the services industry have also seen a trend in the re-domiciliation of Cypriot companies transferring their seat either to Russia or to other Russia-friendly jurisdictions. The complete prohibition of the provision of services to Russian clients has had a significant impact and a lot of Russian-based clients were dropped by firms.
The trend for migration as well as the acceleration of digital transformation across the island and the local businesses due to the pandemic lockdowns imposed on most of the population has brought new opportunities as well as a new digital nomad scheme from the Cypriot Migration Department. The Cyprus Digital Nomad Visa Scheme allows nationals from non-EU and non-EEA countries, who can perform their work location-independently using telecommunications technology, to reside temporarily in Cyprus and work for an employer registered abroad or perform work through telecommunications technology for companies or clients located abroad. The scheme’s goal is to strengthen Cyprus as a centre for the provision of electronic services where, in combination with the other advantages offered by Cyprus, the attraction of digital nomads will contribute to the development of the business ecosystem and consequently to the economic development of the country.
In addition to this scheme, the government launched a new action plan to attract foreign businesses to establish or expand their activities in Cyprus, the Headquartering Scheme. Foreign companies or undertakings operating or intending to operate in Cyprus are entitled to relocate and employ third-country nationals subject to certain eligibility criteria. For this purpose, a Business Facilitation Unit (BFU) has been introduced by the Ministry of Energy, Commerce and Industry, which is being used as a single point of contact between eligible companies and the relevant authorities in Cyprus using a fast-track process.
Both schemes have been well received by foreign businesses and individuals and are widely used in combination of the tax advantages offered to non-domiciled registered tax residents.
New Legislation That Will Have an Effect on Clients
Cyprus was known as a jurisdiction that attracted the incorporation of holding companies due to the tax incentives and advantages given. It is also well known that the use of holding companies without minimal substance (known as shell companies) distorted the internal market with cases of tax avoidance and evasion practices within the EU. In December 2021, the European Commission issued a proposal to prevent the misuse of shell entities for tax purposes (in the form of a proposed EU directive referred to as “ATAD 3”), which is intended to come into effect from 1 January 2024.
The proposed Directive is aimed at EU resident holding companies that claim benefits under double tax treaties and other EU directives but lack minimum economic substance. Undertakings operating legitimately right now could already be inadvertently coming within the scope of the draft Directive upon its implementation in 2024 and should therefore pay particular attention to the provisions of the Directive and to carry out an initial impact assessment on their corporate structures.
Another legislative change is anticipated in the applicability of the reduced VAT on residential properties that was enjoyed both by local and foreign investors. The EU has issued warning for misuse of the VAT directive 2017/541 which allows member states to apply a lower rate for first homes as part of social policy. Currently, the law provides for the application of a lower VAT rate of 5% for the first 200 square metres of primary residences, without any qualifications. This lower rate is applied irrespective of the income, property or economic conditions of the person or the family residing in the house and this is expected to change very soon.
A positive development is expected with the completion of the long-anticipated reform of the Cypriot justice system. Faster processing of cases and modernisation of the civil procedures will tackle the delays in administering justice, and build a new, fast and effective system for administering justice for the public and the country.
Potential Hurdles or Difficulties
The upward pressures on energy prices and high inflation, as well as monetary policy tightening are expected to affect domestic activity both directly and indirectly through weaker global economic activity. Faster and steeper than expected increases in the borrowing costs faced by the private sector will increase credit risk in conditions of a global slowdown and will create challenges to financing for corporations and households. Businesses relying on the Russian market need to find alternative sources and possibly new sectors. Efforts seem to prioritize the utilisation of funds from the EU stability mechanism so as to direct the economy towards the technological and green transition and reduce reliance on oil.