The new kid

As a new EU ‘member in waiting’, Cyprus has become increasingly attractive to investors, discovers James Featherstone

Cyprus is one of those places which was almost destined to be fought over. Sitting where it does, at the very eastern end of the Mediterranean, it is at the crossroads of Europe, North Africa and the Levant.

Unsurprisingly, it has experienced a good three thousand years of being contested – usually bloodily - by surrounding powers. At various times it has been in the possession of the Phoenician empire, the Egyptian empire, the Assyrians, the Byzantines the Ottomans – and, of course, Greece and Turkey.

This year, if all goes according to plans Cyprus will finally become a fully paid-up member of the European Union, ending, in theory at least, that dismal 3000-year run. The island’s accession to the EU has been a long time in the making – as far back as the pre-1974 days, it was assumed that Cyprus would eventually become part of the European club. Now that that has come about, what is the future for an island more sinned against than sinning?

Take a look at economic trends on the island. The challenge for Cyprus over the next couple of years will be to transform itself into the international business centre that has been on offer for some time now. Doing so will, of course, require some form of settlement to the often painful political situation that has obtained on the island since partition.

But if all goes well, accession to the European Union in May will open the door to a major economic push in that direction. Already, Cyprus has had to bring its economy into line with the rest of the EU under the Acquis Communautair rules which stipulate fiscal and monetary disciplines for prospective members. The telecommunications and energy markets will be liberalised, for instance, allowing for greater competition and lower costs on both those areas.

Tax rates, to take another key area, will change. Corporation tax is set to fall from 25 per cent to 10 per cent – a clear incentive to international businesses to set up on the island. The telecoms and energy industries will be further liberalised.

But the economic sector most likely to benefit from EU accession is services. And a major part of this boom in the service sector has been offshore business and finance. Already over the last few years, research has shown that Cyprus’s traditional reliance on agriculture and manufacturing has waned (see Civilitas survey opposite).

The service sector now accounts for about 70 per cent of the island’s total economic life. In fact, this is a trend that goes back at least fifteen years to when Cyprus became a de facto offshore substitute for failing business environments elsewhere.

In the 1970s, two events gave the Cypriot offshore sector a major boost. The outbreak of civil war in Lebanon – just a few tens of miles away to the east – caused a number of Lebanese businesses to relocate to Cyprus. The 1970s ‘oil shock’ during which middle eastern countries hiked up the price of oil, also had a stimulating effect on Cyprus as a place to do offshore business. Companies wanting to do business in a newly oil-wealthy part of the world found Cyprus a convenient base. From both Lebanon and the middle east, money came pouring in.

Today, Cyprus is becoming an increasingly powerful competitor to such places as Gibraltar, at the other end of the Mediterannean. Corporate profits for offshore companies are taxed at 4.25 per cent. There is full tax exemption on the profits of offshore partnerships and branches of companies managed outside the island. Dividends to shareholders are tax free. There are double taxation treaties in place with 27 countries, with more on the way. And, as part of the island’s preparation for accession to the EU, in June 2003 the rules were changed such that any EU citizen can now own shares in a Cypriot company without prior approval by the Central Bank, as was the case previously.

This is a major step towards making Cyprus a truly open economy.
Cyprus has also had a seal of approval from the Council of Europe and the Financial Action Task Force for its anti-money-laundering regulations. There are currently 20,000 offshore businesses located in Cyprus.

One problem has been that Cyrus has been vulnerable to outside shocks to its economy, partly because of the large presence of foreign businesses, and partly because of the extent to which tourism receipts make up the economy. The island’s preparation for accession to the EU, however, has helped smooth some of these shocks.Cyprus Key Facts
Cyprus is the third-largest Mediterranean island covering 9,251 square kilometres, 240KM from west to east, 96 from north to south

Capital; Nicosia
Population: 762,000
Driving is on the left
Retiring to Cyprus

Retirees are treated generously by the Cypriot authorities. A number of incentives are available, including duty free facilities and very low taxation of any income arising from abroad. Retirees also benefit from double taxation agreement with their country of origin. The UK and Cyprus currently have such a treaty in force.

Employees of offshore entities are taxed at half the ordinary rate. Rates for them range from 0 to 20 per cent. Employees of foreign entities who work outside Cyprus are exempt from income tax if their salaries are paid through Cyprus, otherwise they are taxed at one-tenth the normal rates, to a maximum of 4 per cent.

Residence and work permits for foreign employees are generally easy to obtain.

Legal framework is based on English common law.