CYPRUS: COUNTRY AND FOREIGN INVESTMENT REGIMES

Cyprus Geography

Cyprus Population, Language & Culture

Cyprus has a population of 1.1m (July 2010 est), of whom the majority are ethnically Greek, living in the southern part of the island. More than 200,000 Turkish Cypriots and Turkish immigrants live in the northern part of the island, separated from the south by a UN-supervised buffer zone. The official languages in the two zones are Greek and Turkish, but most Cypriots speak English, which is extensively used in business and commerce.

The main cities are Nicosia (the capital and business centre), Limassol, Paphos and Larnaca, these last three being coastal cities around which the important tourist industry is concentrated.

The island's location has ensured that it played a full part in Mediterranean history, and its essentially Greek culture is leavened with many other influences. Classical ruins abound, but the most important modern influence has probably been that of the British, whose stay has contributed substantially to the island's Western business environment.

Cyprus successfully completed the EU accession process, and in May, 2004, the island joined the EU. After a referendum on the so-called 'Annan' plan to re-unify Cyprus saw a heavy vote against the plan in the Greek Cypriot zone (although the Turkish Cypriot north voted in favour) the EU's 'acquis communautaire' is temporarily suspended in the north. Reunification is nonetheless likely to take place along with Turkey's eventual entry to the EU, but the referendum has soured relationships between the parties, and the timing or terms of reunification are now very unclear.

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Cyprus Government

Cyprus is an independent sovereign republic. The 1960 constitution established a unicameral presidential republic, as well as safeguarding human rights, political pluralism and private property. The country is a member of the UN, the Council of Europe and the Commonwealth.

Members of the House of Representatives are elected for a 5-year term by proportional representation. There is a multi-party system with right-wing, centrist, socialist and communist parties.

The last Parliamentary elections took place in May, 2006 (next in May, 2011), with the result that the top six parties contesting the election are represented in the new House of Representatives.

The top four parties were left-wing AKEL which captured the leading position (for the second time) with 31.1% of votes, followed closely by the previous ruling party, the Democratic Rally (DISY), with 30.3%. Centre-right DIKO acquired 17.9% and the Social Democrats (EDEK) won 7.9% of the votes.

The executive government is appointed by the President; presidential elections in March, 2003, saw Tassos Papadopoulos replace Glafcos Clerides as President.

In February 2008, Papadopoulos's bid for a second five-year term as President of Cyprus came to an end.

It emerged after the first round of voting in the general election held that month that Ioannis Kassoulides, a former foreign minister and leader of the conservative Disy party, and Demetris Christofias, the leader of the communist Akel party, were the two leading candidates to take on the country's presidency.

According to election results posted on the Cypriot government website at the time, Kasoulides gained 33.51% of the total votes cast, closely followed by Christofias with 33.29%. Papadopoulos attracted 31.79% of the vote.

Demitris Christofias subsequently became President on February 28, 2008.

Voting in Cyprus is compulsory for all Greek Cypriots over 18, including those enclaved in the Turkish occupied north, Latins, Maronites, Armenians and others who are citizens of the Republic of Cyprus through naturalisation.

There is an independent judiciary, and the Cyprus Supreme Court is the final court of appeal, although of course now that Cyprus is a member of the EU, the European Court of Justice has jurisdiction in some areas of law.

Ongoing differences over the North, and Turkey's putative EU entry dominate politics. In June, 2006, Cyprus avoided using its veto over the opening of the first chapter in Turkey's EU accession talks, on science and research.

However, the Greek Cypriot government urged the EU to push first for action in areas such as the opening of Turkish ports and airports to Cypriot vessels, and the recognition by Turkey of the authorities in Nicosia.

According to reports, they argued that Turkey had made no progress in these areas, and only withdrew their veto, allowing the first of 35 chapters to be opened, once a version of the agreement text had been drawn up which warned Turkey that: "Failure to implement its obligations in full will affect the overall progress in the negotiations."

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Cyprus Economy & Currency

The Greek Cypriot economy is reasonably stable, with a high proportion of GNP (around 40%) based on tourism. Around 3m visitors come to the island annually, 65% from the EU, although tourist revenue came under pressure as a result of 9/11 and sharp rises in Cyprus prices. More than half of the tourists are British. The Government's successful encouragement of the offshore sector has led to the development of a European-standard commercial and financial infrastructure, although there is now no distinction between domestic and offshore companies. International links are particularly strong in the shipping and banking sectors.

Growth has averaged almost 4% in recent years, and Cyprus was expected to notch up growth of 3.9% in 2007 and 3.8% in 2008, although the global economic crisis which developed in 2008 impacted somewhat on these predictions. GDP contracted by an estimated 0.8% in 2009. GDP per capita at purchasing power parity was USD21,200 in 2009 (est).

Inflation and unemployment are both under control, at 0.9% and 5.3% respectively in 2009.

The cost of living is approximately 65% of the EU average. The low crime rate, good housing conditions, excellent climate and plentiful international air links make Cyprus a desirable place to live.

The currency, until January 1 2008, was the Cyprus Pound. In 2008, the country joined the Eurozone, alongside Malta.

The island's EU accession has of course led to the complete removal of exchange controls, and the Cyprus Central Bank allowed local residents to open foreign currency accounts from March 1, 2002.

The IMF said in July 2010 that Cyprus must act to cut the size of the public sector so that tax rates can remain low enough to attract foreign investment. The deficit was driven by rapid growth in public sector wages and employment as well as the expansion of social spending, much of which was not well targeted to help the poorest portions of the population. Meanwhile, the end of the real estate boom has caused an enduring loss of associated revenues, which, the IMF thinks, will not return to previous levels even as the economy resumes growth.

The IMF considers, however, that levels of public debt are moderate relative to many other Euro area countries as a result of past policies.

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Cyprus Stock Exchange (CSE)

The Stock Exchange began operations only in March 1996; it is governed by a Stock Exchange Council.

By October 2001, the market was flirting with the 100 level, having fallen precipitously from 800 at the peak of a short-lived boom in 1999. During 2002 and 2003 the market continued a long-term decline, with brief spurts of growth, reaching a level of 80 in late 2003. In 2004 and 2005 the market remained becalmed, with the index unable to break out of the range 80 - 90.

The Government has toyed with various schemes meant to underpin the market, and litigation rumbles on in the courts over compensation for investors caught out when the market crashed, but it's probably still too soon to imagine that the party will start all over again, given the attractions of the real estate market. Alongside its trading problems, and partly as a result of them, the CSE also has major structural and governance problems, with incessant disagreements between stockbrokers, investors' representatives, the government and the CSE itself.

In March 2002 a co-operation agreement was announced between the Cyprus Stock Exchange (CSE) and the Athens Stock Exchange (ASE), which included provision for the setting up of a Cyprus derivatives market. In May, 2003, the CSE announced its participation in the FTSE Med 100 Index which was officially launched in June of that year. It consisted of 100 stocks from the Athens, Tel Aviv and Cyprus stock exchanges (weighted 56.55%, 42.55% and 0.89% respectively). Initially, five Cypriot firms made up the country's representation on the exchange, and the CSE had a guarantee that the number of Cyprus stocks would not fall below this level. The companies represented were Bank of Cyprus, Laiki Bank, Hellenic Bank, Louis Cruise Lines and Tsokkos Hotels.

In June, 2004, the CSE announced a package of new measures that it hoped would revive the fortunes of the institution by bringing it into line with internationally accepted practices and European Union Directives. Under the plan, the bourse split into three separate markets in 2005: the Main, Parallel and Alternative markets; in addition, there are separate markets for government and corporate bonds and mutual funds.

In May, 2006, the CSE and the Athens Stock Exchange (ASE) began the testing of a new common trading platform.

At the end of June 2007, market capitalisation of shares (excluding Investment Companies Market) reached EUR19.49 billion. In February 2010, total capitalisation across all markets was given as just under EUR6.3bn.

In June 2009 the CSE was designated by the UK's tax authority, HM Revenue and Customs, as a recognised stock exchange. Securities admitted to trading and listed on the EU regulated markets of the Cyprus Stock Exchange (those regulated under Title III of the Markets in Financial Instruments Directive (MiFID) will meet the HMRC interpretation of ‘listed’ as set out in section 1005.3a and b Income Tax Act 2007 for tax purposes.

In June 2010, the CSE announced that it would formally begin to regulate the over-the-counter market.

In July 2010, CSE Chairman George Koufaris told a press conference that the exchange would continue to play a central role in the development of Cyprus as a financial centre, announcing at the same time that the bourse was working on new initiatives to "become a more dynamic and competitive market" in regional terms.

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Cyprus Entry & Residence

The Civil Registry and Migration Department deals mainly with the granting of Entry Permits and also Temporary and Permanent Residence Permits to European Union nationals and aliens. Moreover it is the competent Department for determining the Cypriot Citizenship and granting the Cypriot Citizenship either by Registration or by Naturalisation.

For most nationalities, including the EU, the Council of Europe, the USA and the Commonwealth, no visa is required for entry into Cyprus. In a few cases a visa is required but can be bought at the airport or port on arrival.

Immigration as distinct from occasional or periodic visiting requires a residence permit from the immigration department, which is given fairly freely to a foreigner retiring to Cyprus, and to the senior employees of an offshore company, for whom it is called a Temporary Residence Employment (TRE) permit. Other work permits are issued to foreigners only if there are no suitably qualified local staff available.

Non-EU foreigners, whether or not resident, require permits to acquire real estate in Cyprus, which should normally be for temporary or permanent residence.

Under a law implemented in July 2000, foreigners in Cyprus must either have a five-year work permit or have worked on the island for five years or have a combination of worked time and work permit totalling a minimum of five years before their spouses can join them.

But in November 2000, the Cyprus government introduced new regulations designed to make it easier for some foreigners to have their loved ones live with them. However, this solely applied to those EU nationals and non-Cypriots who work in certain sectors: offshore workers, reporters, foreign correspondents, accountants with big firms, lecturers, teachers and those who have invested a designated amount in local businesses.

The five-year permits would be automatically granted to new foreign entrants into these sectors and those renewing permits would be given extensions long enough to enable them to meet the 'five years in total' clause, the government revealed.

For tax purposes, residence is defined as presence in the country for more than six months of a year.

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Cyprus Business Environment

Cyprus has an excellent business infrastructure with good telecommunications; this coupled with the widespread use of the English language and a legal system largely based on English law makes the island a very convenient and effective business base.

Nicosia, the administrative capital, is also the chief business centre, although Limassol, with its port, and Larnaca, with the main airport, are also significant in business terms.

There are a number of local banks, but many international banks have formed Offshore Banking Units on the island and provide services to foreign or offshore companies. Business legislation created special offshore regimes for a variety of types of business, including shipping companies, insurance companies, and 'Offshore Financial Service' companies, although as from 2003 most distinctions between 'offshore' and 'onshore' were abolished. There is also legislation for Trusts modelled on English trust law.

Taxation for offshore entities was very light until 2003, and Cyprus is unusual among low-tax countries in having tax treaties with more than 40 other countries. These include the CIS and many Eastern European countries; for that reason Cyprus has developed particularly close links with that region.

In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. The new regime was effective from January, 2003.

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Cyprus Larnaca Industrial Free Zone

Businesses operating within the Free Zone are subject to minimal customs formalities; they may import plant, machinery, equipment and raw materials duty-free, while their foreign employees are liable to only 50% of the normal rates of income tax. For a variety of reasons, the Free Zone has not been very successful.

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Cyprus Import of Foreign Capital

Personal interest income derived from foreign capital imported into Cyprus and deposited with a bank operating in Cyprus has traditionally been exempt from income tax. However, the entry into force of the EU Savings Tax Directive has affected this.

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Cyprus Investments by Foreigners

For some time there was a restriction of 49% on foreign participation in Cypriot enterprises, but in many sectors 100% ownership is now permitted, especially in services.

The formal position remains that Central Bank approval is required, and if the level of participation exceeds 49% or if the investment exceeds a designated amount (formerly CY£750,000, now its Euro equivalent), then the Ministry of Commerce, Industry and Tourism also becomes involved. The chances of rejection are now only significant if projects seem likely to cause environmental problems or to compromise national security; investments below the designated amount may also be refused if more than 49% participation is proposed.

The Central Bank permit for foreign investment specifies the activities that may be carried on. Usually, it also requires that foreigners' equity capital must originate outside Cyprus, and must equate to the size of the investment, ie there are thin capitalization rules. Any loan capital must be raised by foreign and domestic shareholders in proportion to their equity stakes.

Permission is required for repatriation of capital, profits, dividends and interest arising from a direct foreign investment in Cyprus, but is normally granted readily. From December 2000 stockbrokers were able to carry out foreign transactions up to a designated amount (then £500,000) without prior permission from the Central Bank, but needed to ask above that figure.

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