1. Introduction

As a country, Cyprus’ name has long evoked images of crystal-clear beaches, golden sand, year-long summer weather, and hospitable residents. Apart from being an exceptional place to live in, Aphrodite’s island also constitutes an ideal space for the development of business activities. Cyprus’ entry into the great European family in 2004 combined with the banking crisis of 2013 has contributed to the creation of an exceptional environment bursting with business and investment opportunities that have not been fully exploited yet.

  1. Strategic Geographical Location – Shipping

Cyprus is situated in a unique geographical location since it is literally located in the crossroad of three continents. Its proximity to the Suez Canal and the ports of the East has contributed to its turning into a main trade center in the area. It simultaneously constitutes an extended base for the European Union in the Middle East, while its strategic location allows it to have a leading role in the preservation of security in the area. Despite significant cultural differences, Cyprus has exceptional financial and diplomatic relations with Israel and all the neighboring Arabic states (Egypt, Lebanon, Syria, Jordan, Saudi Arabia, UAE, etc.) that are safeguarded through a series of interstate agreements. Its geopolitical role has recently been upgraded since it has become a major point of obstruction in the spreading of Islamic fundamentalism, while the Great Powers have recognized its highly important role as a military base.

Cypriot Shipping

Cypriots have had a special relationship with the sea dating back to ancient years, and this has contributed to the creation of an admirable shipping tradition. 100 local and international shipping companies are currently active in Cyprus. As can be seen on the table below, more than 830 ships bearing the Cyprus flag are afloat, making the Cypriot fleet the seventh-largest in the world.

Another notable finding of the table is that a large percentage of those ships (26%) belong to shipping companies based in Cyprus.

Table 2 further enforces Cyprus’ image as a shipping power, since it shows that in 2014 its fleet had the capacity to carry more than 20bn tons.

 

Table 2, however, also reveals a worrying finding – that Cyprus is the only country out of the great shipping forces that have seen its commercial fleet decreasing (10% in the last 5 years). The factors which led to that reduction should be analyzed so that any attempt to offset this negative tendency can be made, especially since the country’s main competitors Malta, Italy and Greece have seen their fleet capacity increasing by 68%, 124%, and 120% respectively in the last 15 years.

  1. The advantages of Cyprus as a full member of the European Union

An accessible gateway of investment in the EU

Cyprus has been a member of the EU since 2004 and a member of the Eurozone since 2008. It also wishes to join the Schengen zone within the next few years. This procedure seems to be stalling because of the political issue in Cyprus and the absence of any control regarding the arrival of people to the northern section of the island through the illegal and not recognized airport in Tymbos, as well as the ports located in the northern occupied part of the island.

As a full member of the European Union, Cyprus belongs to a space of 28 state-members where the free movement of people, products, services, and capital is allowed (the four European freedoms). This practically means that companies based in Cyprus have access to the biggest free market in the world (14 trillion euros in 2014). Besides that, as a member of the Eurozone Cyprus has the same currency with the largest states of the EU, allowing the realization of commercial and financial transactions without the existence of any currency destabilization perils.

In addition, Cyprus’ European state combined with its low tax rates and an attractive program for acquiring permanent residence have contributed toward making Cyprus an offshore business zone and a portal for the movement of capital from third countries (Russia, China, Saudi Arabia, Ukraine, India etc.) to the main European stock markets (London, Berlin, Paris etc.) It is definitely not incidental that more than 225,000 companies from all around the world are registered in Cyprus.

Subsidies and Financing from the European Union

Since it joined the EU, the Republic of Cyprus has actively sought to make full use of all the existing funding programs offered by both the Structural Funds of the EU and the European Investment Bank. 

Structural Funds aim to promote the Regional Policy of the European Union and are given to municipalities, local authorities, private businesses and non-profit organizations activated outside urban centers (e.g. islands, villages, border areas, etc.) These funds offer to fund to the following sectors:

  • Regional development
  • Transport
  • Telecommunication
  • Renewable sources of energy
  • Recycling
  • Research and Development

One of the most important Funds is the European Regional Development Fund, which in cooperation with national governments derogates from its main role by co-funding activities aiding the development of Female and Young Entrepreneurship, as well as the promotion of small and medium-sized businesses of the manufacturing sector.  In Cyprus, these funds are given through the Industrial Development Service of the Ministry of Energy, Commerce, Industry, and Tourism.

The European Investment Bank, on the other hand, distributes its funds through commercial banks. In the majority of cases, funding is offered in conjunction with low-interest business loans with a decreased guarantee. In contrast to Structural Funds, the European Investment Bank sponsors a wide range of companies, activities, and investments, while it possesses sufficient financing dynamic to sponsor large businesses and transnational corporate initiatives. 

  1. A favorable Tax Regime

A Tax Haven?

For many years, Cyprus constituted one of the most attractive destinations for offshore companies to establish a tax base. The low corporate tax of 10% (up until 2012), combined with the opaque procedures in the banking system regarding money-laundering made many states and supranational organizations characterize Cyprus as a tax haven. More specifically, according to the Financial Secrecy Index of the Tax Justice Network, Cyprus is found on the 41st place regarding the safeguarding of tax evasion, financial secrecy and the non-transparency of its financial system. In addition, international state and private entities stress in their reports that Cyprus has been one of the most major stops in money laundering routes, while it has been linked to severe financial and political scandals in Greece. Even though it is impossible to accurately determine Cyprus’ role as a center for money laundering, some macroeconomic indicators point towards those conclusions. For example, between 2009 and 2012, deposits of foreign nationals in Cyprus’ banking system went up from 17 to 27 billion euro (56%). 

Cyprus’ joining the European monetary union in 2008 was a catalyst to its future course as a tax haven. Even from the first five years of the 20th century, the prospect of Cyprus entering the European Union and the Eurozone had already contributed to the significant decrease of the interbank rate. Instead of this translating into lower investment rates, deposit rates increased instead and that attracted a large amount of foreign capital from third countries. Subsequently, when Cyprus joined the Eurozone on the 1st of January 2008 this created a new dynamic regarding the influx of capital. On 18th April 2008, the euro reached its highest point against the dollar, since it was exchanged with 1.59 dollars, which strengthened the role of Cyprus as an easily accessible gateway to purchase the ‘new anchor currency’.

As a transnational organization, the Eurozone constitutes an incomplete monetary union since it has not adopted any form of joint financial policy. Each member state is free to determine its own financial situation since they can vote for a state budget. Nevertheless, the great powers of the Eurozone (Germany, France, the Netherlands, etc.) have in several occasions stated their annoyance regarding the pluralism of tax systems, since that leads to the outflow of capital from their economy to countries with lower tax rates like Cyprus, Luxemburg, Malta, Latvia, Ireland, etc. It is definitely not incidental that the first thing Cyprus was pressured into changing after the financial crisis started was its low tax rates.

The ‘haircut’ deposit in Cypriot banks was only the prelude in the attempt to deconstruct Cyprus’ status as a tax haven. More specifically, Troika’s structural reforms targeted:

  • The absence of adequate and effective mechanisms to prevent money laundering
  • The high degree of secrecy and the refusal to exchange information with the authorities of other countries
  • The boundless lending due to the absence of risk management departments in commercial banks

Today, despite the massive difficulty in the recapitalization of banks, the financial system in Cyprus is at a point of gradual restructuring and recovery. The higher tax rates have had a limited impact on both the existing offshore companies’ choosing to remain in Cyprus and the number of new companies registered in Cyprus every year.  The reforms and the gradual lowering of tax rates are expected to strengthen Cyprus’ status as a tax haven in the long run.

The tax rates in Cyprus.

Found below is a table with the main tax rates in Cyprus. 

Table 3: Tax Rates (brief overview)

 

Despite the cumulative changes in Cyprus’ tax system after the deposit haircut, Cyprus still has one of the lowest rates within the Eurozone and outside it. The table below indicatively shows the tax rates in selected countries.

 

 

 

5. A favorable business environment

Standard of living in Cyprus

Based on the Human Development Index, Cyprus is a developed country with a satisfyingly high standard of living. As can be seen in Table 5, Cyprus is found in the 33rd place along with Malta, both because of its residents’ high life expectancy and because of their high income per capita.

 

The massive improvement of the standard of living in Cyprus in the last 20 years can be seen in the following table, where it is compared to the income per capita of the 19 other countries of the Eurozone. As is illustrated, Cyprus ($28200) surpasses countries like Portugal ($26760) and Greece ($25710) that had traditionally had higher incomes, while it's per capita income is around 77% of the Eurozone’s average ($36822).

 

Cyprus’ commitment to improving its standard of living can be seen from the vast amount of resources allocated towards the development of its human capital. The table below presents the GDP percentage given to fund education in selected countries. As can be easily seen, Cyprus has the first place in this particular table, since it allocates 7.3% of its GDP for educational purposes. This percentage is higher even than that of well-established power players in the educational sector, like the USA, the UK, Germany, France, and Japan.

 

At this point, it is worth mentioning the multilingualism of the workforce in Cyprus. With the 1960 constitution, there are three languages recognized as official in Cyprus – Greek, Turkish and English – while there are large minorities of English, Russian, Ukrainian, Armenian and Georgian origin living in the country.

Business environment

How friendly, however, is the Cypriot environment to the creation of a new business? To answer that question, we need to comparatively study Cyprus’ position based on different indicators.

A useful indicator would be to examine how many days a company needs on average in order to be registered in Cyprus. As can be seen in Table 8, an average of eight days is required for the registration of a new company.

 

Based on this index, Portugal is at the top with only three days needed, while Cyprus’ main competitors in other sectors, Malta and Luxemburg, are in a worse position with 25 and 19 days respectively.

We subsequently examine three indicators that are widely used to determine which countries have the most favorable circumstances for conducting business transactions. The most analytical of the three is the Ease of Doing Business Index, which is prepared by the World Bank. What this index consists of is a number of variables related to the existence of favorable arrangements that aim in making general business activities easier to perform. It indicatively examines the ease of granting building permits, the ease of registering companies, the laws protecting investors, the ease of securing a loan, etc. Table 9 gives an overview of the index scores of selected countries for 2006, 2010 and 2015, while Index 1 at the end of the article gives the analytical scores for 2015 (the higher the score, the more unfavorable the circumstances for business activity). 

 

As Table 9 shows, the position of Cyprus has been weakened in the last five years since it seems to have been overtaken by 24 countries. The main reason behind that drop is the inability to effectively promote reform in matters of urban development and planning. Compared to other countries, the issuing of planning permits is a particularly bureaucratic and time-consuming procedure that makes the business activity harder. These numbers are expected to improve within the next two years since the Cypriot government has much hope in the construction industry and is willing to make drastic reforms. On the other hand, it is also worth mentioning the exceptional place of Cyprus when it comes to protecting minority investors – shareholders (14th place), as well as promoting trading across borders (34th place).

On the Global Entrepreneurship Index which examines mostly the same variables as the Ease of Doing Business Index, Cyprus seems to obtain a higher rank as Table 10 shows.

 

Finally, Table 11 presents the results from the Index of Economic Freedom, an index prepared annually by the Wall Street Journal and the Heritage Foundation.

The index evaluates four pillars of economic freedom that are deemed essential for the development of healthy business activity: 

  • Open Markets (trade freedom, investment freedom, financial freedom)
  • Government Size (government spending, tax burden, fiscal health)
  • Regulatory Efficiency (labor freedom, business freedom, monetary freedom)
  • Rule of Law (freedom from corruption, property and business rights, government integrity)

The analytical ranking of the table is given in Index 2.

The ranking of Cyprus in these three indexes only matters within a comparative analysis. It is remarkable that in all three cases, the Baltic countries that underwent a painful readjustment period after the collapse of the Soviet Union have formed a more favorable business environment than Cyprus. The Republic of Cyprus has a margin for vast improvement, and it is given that once the wounds caused by the financial crisis have properly healed, the government will be able to push for brave reforms that will further strengthen and support business activity.

  1. Conclusion

Despite the vast financial hardships faced by Cyprus after the banking crisis of 2013, it continued to retain multiple advantages and is still one of the top choices of a European country ripe for the settling and activity of offshore companies. With its economy well on its way for recovery and combined with its geographical location, low tax rates, favorable business legislation and a flexible regulatory framework, a positive environment for business activity is a given. 

Index 1 – Ease of Doing Business Index (2016)

 

Index 2 – Index of Economic Freedom (2016)