Doing Business in Cyprus

Cyprus as an International Business and Financial Centre

Cyprus is the third largest island in the Mediterranean Sea, situated at the crossroads of three continents and in the trading paths of the first merchants of antiquity. Cyprus’ significant geographic location has been a major factor in shaping its history.

The island’s strategic location, in conjunction with its agricultural and mineral wealth, rendered it a transit trade centre in the region. These were the main reasons that attracted various conquerors, who managed to control the main trade routes of the time by having the island under their rule.

After having experienced a lot of conquerors, Cyprus finally gained its independence in 1960 and was declared an independent State. One of the main tasks of the first government was to accelerate the rate of economic growth and create a sustainable infrastructure. Consequently, the yearly rate of growth during the first years of independence had reached 7%.

The favourable results of 13 years of planned development were led to a temporary halt as a result of the Turkish invasion and occupation of the northern part of Cyprus in 1974. For a while, the economy was on the brink of total collapse and faced with a series of difficulties. It managed, however, not only to recover but also develop.

At present, the tertiary sector (services) is considered the backbone of the island’s economy, and Cyprus has been established as an international business centre and centre for providing services.

Foreign Investments in Cyprus

The attraction of foreign direct investment, including the promotion of joint ventures between Cyprus and foreign enterprises, has always been a major objective of government policy, with a view at facilitating the transfer of advanced technology and expertise.

In particular, the Government of the Republic of Cyprus has proceeded with the liberalisation and simplification of the procedures governing the approval of foreign direct investment.

As of 1 January 2001, the ceiling on interest rates has been abolished. Money markets have since continued to function in an orderly manner and rates are already beginning to decline. This development has been proceeding hand in hand with the liberalisation of capital movements by the Central Bank of Cyprus.

Additionally, direct investments in Cyprus by residents of the EU member states and Cypriot residents in the EU have been liberalised, blocked accounts have been abolished and medium and long term borrowing by Cypriot residents in foreign currencies is now free.

Naturally, the following question arises: why would a foreign investor choose Cyprus? The answer can be found in the following traits:

• Democratic system of governance
• Free market economy
• Strategic location at the crossroads of three continents
• Excellent telecommunications system - direct dialling to over 200 countries
• Modern and efficient legal, accounting and banking services based on English practices
• Favourable tax regime including 10% rate of corporation tax (as of 1 January, 2003)
• Double tax treaties with 40 countries
• Bilateral investment agreements with 16 countries
• Low set up and operating costs
• Highly qualified managerial, clerical and technical staff available.

The dynamism of the Cyprus economy

Cyprus’ economy is market-oriented, with the private sector playing the dominant role in the production sphere. The government’s role focuses on the creation of a favourable entrepreneurial climate, through the maintenance of conditions of macroeconomic stability, the upgrading of socio-economic and legal infrastructure, and the pursuit of sustainable development.

The economy of Cyprus has exhibited dynamism and flexibility throughout the period since the island’s independence. In spite of the 1974 Turkish military invasion and its devastating aftermath, the economy managed to recover and attain some major accomplishments. It is no coincidence that a few years after the invasion, the international Press described the Cypriot economy’s leap forward as a real “economic miracle”.

Some of the accomplishments are the following:

• An impressive real annual rate of growth of GDP.
• The rapid growth of GDP accompanied by the creation of a large number of employment opportunities and the consolidation of conditions of full employment.
• The satisfactory growth performance accompanied by conditions of relative internal and external economic stability.
• The rapid rate of growth was accompanied by a profound restructuring of the economy from the sectoral point of view.

The International Monetary Fund evaluates the Cyprus economy

The Executive Board of the International Monetary Fund (IMF) mentions with regard to the situation of the Cyprus economy, in its report on 31 January 2003, that “over the last two decades economic performance has been impressive, with GDP per capita rapidly approaching the average level in EU countries. Strong growth has kept the unemployment rate below 4% for the past two decades, inflation has remained under control, and the fiscal deficit has averaged below 3.5% of GDP during the past decade”.

Furthermore, the IMF Executive Directors welcomed “the substantial progress achieved on the reform agenda, including the abolition of the interest rate ceiling; the granting of legal independence to the central bank; continuing capital account liberalization; and the reform of the tax system”, adding that “these achievements have helped pave the way for European Union membership in 2004”.

Cyprus – European Union

As of 1 May 2004, Cyprus is a full member state of the European Union.

Formal relations with the EU date back to 1972 with the signing of the Association Agreement which was basically a trade agreement. In 1987, a Customs Union Agreement was signed between Cyprus and the EU. The relations of Cyprus and the EU entered into a new dimension with the application of Cyprus for full membership to the Union in July 1990. Accession negotiations began in 1998 and were successfully concluded at the end of 2002. On 16 April 2003, Cyprus singed, along with the other nine acceding countries, the Treaty of Accession to the European Union, paving the way towards full EU membership on 1 May 2004.

The EU constitutes Cyprus' main trading partner absorbing more than 55% of its domestic exports and supplying around 50% of the total imports to Cyprus. Furthermore, around 70% of tourists visiting the island originate from EU member states.

In addition, Cyprus maintains close political and trading ties with the countries of the Middle East region, both the Arab world and Israel, as well as with the former socialist countries of Central and Eastern Europe. In that sense, as an EU member state Cyprus will become a bridge connecting the united Europe and the Middle East.

Cyprus – A shipping centre

Cyprus has also developed into an international shipping centre for the conduct of maritime activities and the rendering of shipping services worldwide. It ranks sixth in the list of leading maritime nations, with a fleet of 2,700 vessels of over 26 million gross tonnages.

This development is attributed to the comparative advantages of Cyprus as well as the excellent services offered to the sector. However, Cyprus cannot be regarded as an opportunity flag state. The government of the Republic of Cyprus has ratified major international conventions on maritime safety, the prevention of sea pollution, the training, certification and watch-keeping of seafarers, and the limitation of ship-owners' civil liability in case of oil pollution damage, as well as conventions on maritime labour.

Over the last two years, the legislation ruling merchant shipping has been significantly modernised, particularly through the ratification of all major international maritime conventions and the adoption of the acquis communautaire.

Cyprus has also set up a network of inspectors of Cyprus’ ships, which is expanding constantly, now amounting to 35 inspectors covering 25 ports in 14 countries. These measures aim at improving the safety conditions of Cypriot ships.