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 twentieth 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, especially Russia, 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 the CIS 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
Having enjoyed 50 years of uninterrupted growth since independence, Cyprus was initially unaffected by the global economic downturn, largely because its banks had not invested in complex financial derivatives that subsequently proved to be toxic.
However, the Greek economic crisis had a substantial "knock-on" effect on Cyprus. The two largest Cyprus banks had sizeable operations and assets in Greece, including €6 billion of Greek government debt. The "haircut" imposed by the Eurogroup at the beginning of 2012 as a condition of the Greek bailout cost them approximately €5 billion, and they also incurred substantial losses on their commercial operations in Greece. In May 2012 the Cyprus government was forced to nationalise the second-largest bank in order to keep it afloat. It became clear at around the same time that the government finances were also unsustainable and that urgent action was required to eliminate public sector waste.
In June 2012 the Cyprus government applied for external support, and negotiations with the European Commission, the European Central Bank and the IMF regarding the terms of a bailout were concluded in March 2013.
In order to combat the economic difficulties the government introduced a number of measures during 2012 to increase Cyprus's competitiveness as an international financial centre.
In March 2012 the long-awaited law modernising the International Trusts Law of 1992 was enacted. It addressed a number of perceived deficiencies in the international trusts regime, removed outdated restrictions, increased settlor flexibility and further strengthened the already-formidable asset protection defences of Cyprus international trusts. This reform, combined with the modernisation of the regulatory regime, which took place a few months later, restored Cyprus to the premier league of trust jurisdictions.
May 2012 saw the introduction of substantial incentives for investment in intellectual property, most notably an 80% deduction against revenue from the exploitation of intellectual property rights. Combined with other allowances and Cyprus's low corporate tax rate, this results in an effective tax rate of less than 2% on revenue from intellectual property, by far the lowest rate available in Europe. Furthermore, gains on disposal of intellectual property assets can effectively be fully sheltered from tax.
In November 2012 a new double tax agreement was signed with Ukraine. There had been vocal criticism of the existing agreement in Ukraine on the grounds that it was unduly generous and it was widely feared that a number of benefits would be lost under the new agreement. These fears proved to be unfounded: the highly beneficial provisions regarding taxation of capital gains were untouched and Cyprus retains its highly favourable status as a jurisdiction for holding Ukrainian property assets.
On January 1 2013 the Protocol to the double tax agreement with Russia took effect and Cyprus was removed from the so-called Russian tax blacklist. Companies incorporated in Cyprus are now entitled to the Russian participation exemption, under which dividends received by Russian companies from qualifying investments are exempt from tax. Furthermore, transactions between unrelated Russian and Cyprus companies will no longer be subject to the automatic transfer pricing control scrutiny in Russia that applies to locations included in the "blacklist".
Inevitably, these positive developments received far less media attention than the "haircut" imposed on depositors in Cyprus's two largest banks as a condition of EU financial support in March 2013. It is important to note that only the holders of deposits with the two banks concerned were directly affected and that the shrinking of the banking sector does not directly affect any Cyprus corporate and trust structures, nor does it detract from the favourable Cyprus holding company regime and the advantages offered by other Cyprus structures, since there is no requirement for Cyprus companies, entities or trusts to open or maintain bank accounts in Cyprus. The other benefits of the Cyprus holding company regime such as the tax-free flow of dividends through Cyprus and the beneficial exit opportunities offered by Cyprus's favourable national tax legislation and wide network of double tax treaties remain intact.
To date, activity levels in the professional services sector have been largely unaffected by the domestic economic problems, as most of its activity derives from investment passing through Cyprus to other jurisdictions rather than remaining there. International companies continue to choose Cyprus as the base for their European and Middle Eastern activities, taking advantage of the favourable business and tax system, not to mention the excellent quality of life. The confirmation of significant gas deposits offshore Cyprus offers the prospect of new economic activity and prosperity in the medium term.
In summary, Cyprus remains very much open for business.