Elias Neocleous of Andreas Neocleous & Co in Limassol looks at the current state of the Cyprus 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
The early months of 2013 were dominated by the "bail-out" of Cyprus. For the first time, depositors in banks were compelled by international creditors to contribute to the recapitalisation of the banks, and depositors in Cyprus's two largest banks lost all or a substantial proportion of any balance in excess of €100,000. Many people lost their life savings and a number of businesses closed, and the death of Cyprus as an international financial centre was widely predicted, not least by some competitor jurisdictions. However, although the banking sector was damaged by the Eurogroup decisions, 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, and the predicted exodus of investment did not materialise.
Increase in corporate tax rate
At the behest of Cyprus's international creditors, the corporate tax rate was increased from 10% to 12.5%. Even after the increase, the rate is among the lowest in the EU and most holding companies have not been materially affected. Furthermore, the other benefits of the Cyprus holding company regime, including the tax free flow of dividends and the beneficial exit opportunities offered by Cyprus’s favourable national tax legislation and wide network of double tax agreements, remain intact.
Economic citizenship programme
In April 2013 the government announced an economic citizenship programme, under which individuals with substantial economic interests in Cyprus and their dependents may 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.
Regulation of corporate and fiduciary service providers
The Law Regulating Companies Providing Administrative Services and Related Matters of 2012 ("the ASP Law") regulates the provision of company and trust management services, offering security to clients and strengthening confidence in the sector.
In September 2013 the ASP Law and the International Trusts Law were amended to create a register of trusts established in Cyprus. Each of the supervisory bodies under the ASP Law is required to maintain a register of trusts established by service providers they regulate containing the following information:
• the name of the trust;
• the name and address of every trustee at all relevant times;
• the date of establishment of the trust;
• the date of any change in the law governing the trust to or from Cyprus law; and
• the date of termination of the trust.
These changes will enhance Cyprus’s reputation and position as a fully transparent trust jurisdiction with a legal infrastructure, which entrenches jurisdictional and asset protection whilst fully complying with all EU and domestic anti-money laundering laws and regulations. Nevertheless, as the registers of trusts are not open for public inspection, confidentiality is fully protected.
New double taxation agreements
On January 1 2014 five new of double taxation agreements (DTAs) took effect between Cyprus on the one hand and, respectively, Estonia, Finland, Portugal, Spain and Ukraine on the other. The first four are new agreements, and the agreement with Ukraine replaces the Cyprus – USSR agreement, which Cyprus and Ukraine had adopted following the dissolution of the USSR. All follow the OECD Model Convention.
The new DTAs with Estonia, Finland, Portugal and Spain are expected to lead to a substantial expansion of economic ties and reciprocal investment activities. The revised agreement with Ukraine retains the principal benefit of the DTA it replaced, namely the highly favourable provisions regarding capital gains on disposal of shares in property-rich companies. Movable property including shares is taxable only in the country of residence of the owner and since Cyprus imposes no tax on disposals of shares except and to the extent that the gain is derived from real estate in Cyprus, Cyprus companies have become an ideal means of holding real estate in Ukraine, effectively allowing property to be disposed of tax-free and making Cyprus one of the world's most tax-effective jurisdictions for holding Ukrainian property assets.
A preliminary conclusion
A year after the bail-out, it is clear that reports of Cyprus's demise as an international financial centre were premature. The targets for economic reform agreed with international lenders are being met or exceeded and the international services sector has held up well and is likely to be one of the drivers of recovery. While there are undoubtedly challenges ahead, progress to date is highly encouraging, and Cyprus remains very much open for business.
Andreas Neocleous & Co
About the author
Elias Neocleous leads the corporate and commercial department of Andreas Neocleous & Co, 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.