Despite
predictions of its demise as an international business centre by its
competitors and detractors, Cyprus continues to stand tall and is adamant not
to ‘waste this crisis’, but to turn it into an opportunity to become a more
competitive jurisdiction.
Fresh
from securing €10 billion in financial assistance, the country is now focused
on restructuring and revitalising the economy, making sure every cent counts in
safeguarding the future. With Cyprus’ corporate structures still a compelling
proposition for global companies, new investment opportunities in tourism and
with the ‘world class’ discovery of hydrocarbons, there is every reason to
believe that Cyprus will weather the storm.
Cyprus
has taken centre stage in recent months as the fifth EU member state to request
a financial assistance package. The small Eastern Mediterranean country
captured the world’s attention as it fought hard to bounce back from the brink
of bankruptcy through intense negotiations with international lenders, while at
the same time undergoing presidential elections and a change of government.
Recent
economic developments have put Cyprus on the world map, albeit for all the
wrong reasons, but what may have been lost in the coverage of these events is
that the island’s core offering remains as relevant today as it has for the
past decade. The country’s status as a financial centre has certainly been
wounded, but what remains intact is Cyprus’ solid experience in corporate
structuring and offering blue chip companies and tax planners preferential
access to high growth markets like Europe, Russia, China and India. With close
to 50 double tax treaties, Cyprus continues to provide international businesses
an attractive base for their operations, a fully EU-harmonised tax and legal
framework and one of the lowest and most competitive corporate tax rates in
Europe at 12.5%.
The
Perfect Storm
The
current situation in Cyprus has been described by many as the perfect storm.
Having enjoyed decades of uninterrupted growth before the current global
financial crisis, Cyprus first began to feel the effects in 2010 when the
booming construction and real estate sector suffered a severe hit with falling
property prices and a decrease in overseas buyers.
The
economic climate deteriorated further with rising unemployment, a bloated
public sector and public overspending pushing the government deficit further
into the red. But even at that stage the
situation was manageable. While Cypriot banks were already grappling with a
rising number of non-performing loans, the collapse of the Greek economy and
the island’s significant exposure to Greek government bonds became the
proverbial straw that broke the camel’s back.
Both
domestic and international critics have questioned why Cyprus invested so
heavily into Greece. Cyprus has strong trade and investment relations, as well
as a cultural and religious affinity with Greece, provided a natural market in
which to expand during the boom years. Government bonds are not usually
considered to be a risky investment and there was some pressure on Cypriot
banks, especially those operating in Greece, to buy the bonds. However the
risks involved were grossly underestimated as was the outcome of the Greek
bailout, which imposed staggering losses of around €4.5 billion on Cypriot
banks following the EU/IMF debt haircut on Greece.
The
Banks
The
unprecedented decision by the Eurogroup to impose losses on depositors sent
shock waves around the world and resulted in the closure of Cyprus’ entire
banking sector for nearly two weeks with the imposition of capital controls in
a bid to prevent a bank run. However, what emerged as the world watched with
baited breath, was not a run on the banks or violent riots, but a defiant show
of resilience and solidarity among the Cypriots – who say ‘we have overcome
worse times than this’. Granted, there has been justified anger over these
developments and the losses imposed on uninsured depositors. Cypriots and the
local banking sector have been severely affected by the winding down of Laiki
Bank and the restructuring of the Bank of Cyprus, and those with deposits over
€100,000 in these banks have unfortunately had to take this costly setback ‘on
the chin’.
Despite
reports of Cyprus’ financial centre
being in complete meltdown, in reality, out of the 40 banks operating in Cyprus
only two local banks have been forced to undergo restructuring – leaving the
majority of banks on the island unaffected. Today, temporary capital controls
remain in place to safeguard the banking system and while a definite date is
yet to be set to lift these measures, companies in Cyprus have reportedly been
able to operate despite the inconvenience. Naturally, both the government and
the private sector are keen to see these controls lifted as soon as possible
and there have been assurances that the restrictions on capital movement will
gradually be relaxed as the situation improves.
Money
Laundering
Prior
to joining the European Union in 2004, the reputation of Cyprus suffered from
rumours of money laundering, tax evasion and being a haven for Russian
oligarchs. During the negotiation process to join the EU, Cyprus had to undergo
extensive measures to implement its current fully EU-approved tax framework.
Cyprus is also on the OECD White List and has implemented all EU directives to
achieve transparency. In fact, Cyprus is currently the only EU member state
applying a stricter threshold to identify beneficial owners of legal entities –
in Cyprus 10% ownership must be disclosed rather than the EU benchmark of 25%.
However,
these rumours resurfaced once again during the bailout negotiations and many
saw them as an unjustified attack and unfair treatment, considering the
measures Cyprus has taken to combat money laundering have been internationally
assessed several times by the Council of Europe Committee (MONEYVAL). Of course financial crime occurs worldwide,
but Cyprus’ professionals point out that the country’s money laundering
regulations rate better than most countries levelling these allegations.
Sectors
of Opportunity
Despite
the positive measures taken by the government and private sector, the Cypriot
economy is expected to contract by an alarming 8% in 2013, shrink by a further
3% in 2014 and return to growth only in 2015 or 2016. The key challenge now is
for Cyprus to control government expenditure and to generate export of services
and goods. The road ahead will be long and rocky, but there is reason for
optimism with strong economic sectors such as professional services, tourism
and shipping. The light at the end of the tunnel for Cyprus has been the
discovery of vast hydrocarbons reserves in its Exclusive Economic Zone (EEZ),
which if fully exploited could see the reversal of Cyprus’ fortunes.
Energy
is the new boom industry in Cyprus and the country has attracted worldwide
attention and serious international investment. The country has begun
developing strategies to exploit its new-found hydrocarbon wealth, following a
‘world class’ natural gas discovery by US-company Noble Energy in 2011. The
reserves are currently estimated at around 7 trillion cubic feet (198 billion
cubic metres) – enough to meet the domestic gas demand for around 100 years.
There is increasing interest to invest in the energy sector and auxiliary
services in Cyprus, presenting new opportunities for growth in the
well-established legal, financial services and even construction sectors.
Cyprus has already signed multi-million-euro agreements with an Italian and
South Korean consortium, ENI/KOGAS, and with French energy giant Total to start
natural gas exploration in its other EEZ blocks – and has plans to start
building a new infrastructure to utilise natural gas locally. Cyprus is
positioning itself to become a regional energy hub and the reserves could
contribute to EU energy security.
Cyprus’
maritime sector continues to grow and the island is considered one of the most
influential global hubs for ship owning and ship management services – boasting
some of the world’s most influential names in shipping. Cyprus is the largest
third party ship management centre in Europe and the largest crew management
centre in the world, while the island’s international ship register is the
third largest in Europe and the tenth largest in the world. This sector
contributes over €1 billion to the economy annually, accounting for around 7%
of GDP, and directly employs 4,000 shore-based personnel and 55,000 seafarers
worldwide. Shipping is one of the success stories in Cyprus and has a fully
EU-approved tax tonnage system in place. The overall operational and tax infrastructure
for shipping in Cyprus has remained intact, despite current economic
developments.
Tourism
is expected to do exceptionally well this year. Cyprus saw a 10% increase in
visitors in 2012 and projections for 2013 also expect increased numbers. In
addition to the traditional ‘sun and sea’ package, Cyprus has been diversifying
its tourism product with the development of luxury marinas and golf courses and
niche markets such as cultural, conference and agro-tourism. Sports tourism
alone generated around €20 million in 2011. Medical tourism is also on an
upward trajectory thanks to the many excellent private hospitals and
highly-trained medical professionals. Casinos are another new development,
which could open up new investment opportunities and revenue streams of up to
€50 million annually, according to the Cyprus Tourism Organisation.
The
international business and professional services sector has proved remarkably
resilient and has continued to grow throughout the international financial
crisis. Following the bailout agreement, business leaders have shown optimism
saying the impact on international business is not expected to be as
significant as first projected. According to a number of accounting and legal
firms, the majority of their foreign clients using Cyprus as a regional base or
a gateway for investment have expressed confidence in the country as a regional
business hub, stating they will continue their operations on the island. Cyprus
is mostly used as a business and tax planning jurisdiction and not as an
investment location, where foreign investors ‘park’ their funds as part of
asset management strategies. While the international business centre is the
single most important sector of the economy, it will face challenges and
increased competition in core markets, but Cyprus’ strong track record and
redoubled efforts to implement new incentives will help maintain and further
develop this important sector.
Rolling
out the Red Carpet
In
addition to the positive outlook of these sectors, the government is
implementing new measures to boost the economy. Tax-incentives, fast-tracking
of permits for large projects and the relaxation of measures to encourage
foreign direct investment into the country will certainly strengthen the
economy. In the past, bureaucracy was a key source of frustration for the
business community, but the many reforms being implemented today will create a
more efficient Cyprus – supporting the efforts to secure a speedy recovery from
this economic crisis.
The
Cypriot resilience and entrepreneurial spirit has proven formidable throughout
its history and despite the current challenges in the local economy, Cyprus
presents many new and exciting opportunities. In a high value-added service
economy, innovation is the key to survival and the silver lining of a crisis is
the chance to restructure, rethink strategies and explore new opportunities.
The road ahead will be challenging, but with the right decisions, investment
and action Cyprus is hoping to come out of this crisis stronger than ever.
Weight
for me tomorrow. Paul
Paul Lambis is the author of “Where is Home?” – A journey of hilarious contrasts.
For more information on Paul Lambis, and to order his book online,
visit www.paul-lambis.com
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