New legislative developments
Andreas Neocleous & Co
Elias Neocleous (Bio)
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 on January 1 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.
Current economic conditions
Cyprus has enjoyed 50 years of uninterrupted growth since independence. It was initially unaffected by the global economic downturn, largely because its banks are generally conservative and had not invested in toxic financial products. Until mid-2009 the received wisdom was that the global economic crisis had passed the island by. However, tourist arrivals fell sharply during 2009. This coincided with a steep fall in demand from overseas buyers for property in Cyprus, causing both the tourism and the property sectors to feel the pinch. The underlying problem for both industries is that the foreign customers on whom they are so heavily reliant (particularly the British, the traditional mainstay of the tourism and property markets) have seen their disposable income and resources affected by the downturn, and are cutting back on discretionary purchases such as holidays and second homes. Both tourism operators and developers are re-positioning in order to attract customers from Eastern Europe and the Middle East but it will take some years for demand to recover to pre-crisis levels.
A number of new clouds have appeared on the horizon. The government deficit urgently needs to be addressed and parts of the banking sector are heavily exposed to Greece. Nevertheless, the economy seems to be holding up well overall and the financial and professional services sector continues to enjoy high levels of activity. A number of international companies have chosen Cyprus as the base from which to enter the European market and have established new offices in Cyprus, taking advantage of the favourable business and tax system. The recent discovery of significant offshore gas deposits offers the prospect of new economic activity and prosperity in the medium term.
Recognising the need to maintain its competitiveness as an international business centre, Cyprus has continued to introduce new laws in order to reduce the tax and administrative burden on businesses and has reached agreement on several new and modified double tax treaties, resulting in its removal from blacklists that had previously denied benefits to Cyprus-resident companies.
A number of amendments were made to the Companies Law, including the introduction of provisions allowing private companies to provide financial assistance for the acquisition of their shares, subject to appropriate safeguards, and the streamlining of procedures for the registration of charges and shares, in order to eliminate unnecessary bureaucracy and reduce the administrative burden on business.
Double tax treaties
During 2010 and the early months of 2011 Cyprus agreed new double tax arrangements with Armenia, Denmark, Germany, Kuwait, Slovenia and the UAE. The May 2009 Protocol to the Cyprus – Russia treaty, which settled a number of outstanding issues on information exchange, was signed in October 2010 during the Russian President's visit to Cyprus and is expected to be ratified in 2011. It removes Cyprus from the so-called Russian blacklist and giving Cyprus most favoured nation status on a number of tax issues. The Protocol provides robust safeguards for taxpayers on information exchange and preserves Cyprus's attractive withholding tax treaty rates.
Shipping tax reform
During 2010, legislation was enacted to put in place an EU-approved tonnage tax regime for companies engaged in international maritime transport and ship management. The Merchant Shipping (Fees and Taxing Provisions) Law of 2010 has retroactive effect from January 1 2010. It gives owners, charterers and managers of qualifying ships the option of paying tax based on the net tonnage of the fleet that they operate instead of being taxed on the actual profits of their maritime transport activities and significantly reduces the burden of taxation.
When Demetris Christofias was elected President of Cyprus in 2008, eyebrows were raised in various quarters at the apparent paradox of a Russian-educated communist heading the government of a leading financial centre.
In office, his government has shown its determination not simply to maintain Cyprus's business-friendly credentials, but to enhance them. The government has made clear that any movement towards a European Common Consolidated Corporate Tax Base must respect the current comparative and competitive advantage of member states. Current proposals to reform the Cyprus International Trusts Law will result in a modern trust law which provides an attractive environment for would-be investors and provide a welcome boost to the trusts sector. It is clear that this pragmatic approach will continue.