Elias Neocleous of Andreas Neocleous & Co in Limassol provides an introduction to the Cypriot market
Cyprus is a well-established international business and financial centre, strategically located at the crossroads of Europe, Africa and Asia. A British colony for much of the 20th century, Cyprus became independent in 1960. It joined the EU in 2004 and the Eurozone in 2008. It has a transparent, robust and independent legal system based on common law and a modern, business-friendly legal and taxation system. Tax rates are among the lowest in the EU and there is a wide network of double taxation treaties offering attractive planning opportunities.
Since joining the EU, Cyprus has consolidated its position as the natural portal for investment into the dynamic economies of Eastern Europe and established itself as a prime bridgehead for investors from outside the EU wishing to set up a base in Europe. While Russia and Eastern Europe remain the most important markets, in recent years there has also been a significant increase in business with China, India and other Asian countries. In a reversal of the accustomed direction of investment flows, Cyprus has also become a portal for investors from Russia and Eastern Europe investing overseas.
Cyprus is also a major shipping and ship management centre. The Cyprus fleet is in the world’s top ten in tonnage terms and Cyprus is home to the largest number of third party ship management companies in the world.
The economic backdrop
Cyprus has made an excellent recovery from the economic crisis of 2013. Despite having formally exited its three-year Economic Adjustment Programme in March 2016 it is continuing with economic and legal reforms, including the privatisation of the Cyprus Telecommunications Authority. Although the banking sector was damaged, the other two pillars on which Cyprus's success as an international business centre is based, namely its transparent legal system and its high-quality professional services, remained intact. Not only did the predicted exodus of investment not materialise, but on the contrary the reforms made under the adjustment programme have strengthened the island’s position as an international financial centre.
The business and investment 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.
The tax system is a particular source of competitive advantage. Cyprus's modern, simple tax system is fully compliant with EU and OECD standards and tax rates are among the lowest in the EU. There are double taxation agreements covering 56 countries and the network of agreements continues to expand. 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 an appropriate 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 10th largest fleet in terms of registered tonnage, Cyprus is also home to myriad shipping and ship management companies. Its tonnage tax system, introduced in 2010, 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.
The economic citizenship programme, in place since 2013, allows individuals with substantial economic interests in Cyprus and their dependents to obtain Cyprus citizenship by naturalisation on an accelerated basis. Applicants must have a clean criminal record and own a residence in Cyprus, and must invest €2.5 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, Cyprus citizenship considerably simplifies international travel and visa requirements and is proving highly attractive to high net worth individuals.
Continued reform and modernisation
The government has pressed ahead with its programme to support economic recovery, attract inward investment and boost Cyprus’s attractiveness as a competitive but reputable international financial centre. The network of double tax agreements continues to be extended: new agreements with Bahrain, Georgia and Switzerland are now in force and new agreements have been signed with Ethiopia, Iran, Jersey and Latvia. A Protocol to the double tax agreement with Ukraine has been signed that preserves the highly favourable provisions regarding taxation of capital gains until at least 2019 and affords “most favoured nation” treatment to Cyprus.
In December 2015 the final components of a tax reform package aimed at encouraging economic activity and attracting inward direct investment were enacted, including reduction of transfer fees on real estate transactions, temporary exemptions from capital gains tax, extension of accelerated capital allowances until December 31 2016, introduction of a notional interest deduction on newly-introduced equity capital, the introduction of non-domiciled regime for taxes on interest, dividends and rent and an extension of income tax exemptions for high-earning individuals taking up residence and employment in Cyprus. In July 2015 the government announced a permanent reduction in real estate transfer fees and the abolition of the annual immovable property tax.
Further legislative changes are in prospect, including a new, modern law on foundations.
A preliminary conclusion
Cyprus’s 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 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.
Andreas Neocleous & Co
About the author
Elias Neocleous leads the corporate and commercial department of Andreas Neocleous & Co LLC, Cyprus's largest firm of lawyers. Elias graduated in law from Oxford University in 1991 and is a barrister of the Inner Temple. He was admitted to the Cyprus Bar in 1993. His main areas of practice are cross-border mergers and acquisitions, banking and finance, trusts and estate planning and tax.