Background
The economic landscape of Cyprus has undergone a remarkable transition since gaining independence from the United Kingdom in 1960. The British left behind an island lacking in natural resources and dominated by agriculture and package tourism. The Cyprus of 2022 is a member of the European Union (since 2004) and Eurozone (since 2008), a modern and fully transparent international centre for business and finance, and home to one of the largest merchant shipping fleets in the world.
This development has not been accidental. Successive governments have strived to diversify and grow the country’s economy by being innovative and generating plans focusing on the attributes that Cyprus does have, namely:
- A geographic location which is at the intersection of three continents;
- A young, well-educated population with many people fluent in English as well as Greek;
- A legal system based on common law, and since the late 1970s,
- A stable political system.
Recognising these strengths, Cyprus governments, irrespective of party politics, have for many decades sought to promote and enhance them in order to encourage foreign direct investment into the country. This has resulted in the crafting over time, of a business, taxation and regulatory environment that, whilst being fully compliant with EU, OECD and international regulations and laws, is welcoming rather than forbidding. Running in tandem with this has been the parallel growth of a professional service sector which now contributes approximately 9 % of annual Gross Value Added.
Building a modern economy
The first stage in this process was to try to diversify the economy by taking advantage of its geographical location and promoting Cyprus as a shipping and trading centre. Thereafter there are three key events that have been instrumental in building the modern Cyprus economy.
- The dissolution of the USSR in the late 1990s. Citizens of Cyprus and the USSR shared many cultural ties including religion. This resulted in Cyprus becoming a natural conduit for investment funds from the developed west flooding into the former USSR and Eastern Europe. Similarly, money from the former communist states also flowed into Cyprus. This significantly expanded the demand for professional law and accounting firms and the range of services that they were expected to provide.
- Becoming a member state of the European Union (EU) in 2004 and of the Eurozone in 2008. In preparation for joining the EU Cyprus was required to make significant structural and economic reforms which helped to modernize the economy and shifted its image from one of being a ‘tax haven’ to one of a legitimate low tax economy compliant with EU laws. Fiscal and regulatory regimes are now fully aligned with EU norms. The result of this has been that Cyprus has become a portal for cross-border investment from eastern European, Middle-Eastern, Asian and African nations all seeking a gateway into the EU and vice versa. This high level of cross-border activity necessitated a corresponding boom in professional services dealing with start-ups, holding company, investment, contract, and merger and acquisition activity.
- Economic bail out by the EU in 2013. The economic crisis of 2009-13 exposed the weakness of many financial institutions which were vastly overexposed to the Greek market and the property sector. Assistance from the EU was conditional on Cyprus instituting significant regulatory and structural reform. This included rationalization of the banking sector via insolvency, merger and acquisition and, a privatization requirement for many key industry sectors including telecommunication and marine ports. Privatization was a new concept for Cyprus and opened new avenues of work for the corporate and commercial professionals in structuring bid vehicles and, the bids themselves.
Moving in tandem with all of the above, and a key factor in Cyprus’ growth as an international business centre has been the conscious growth of a simple, modern, transparent tax system. Cyprus has supplemented its natural advantages by developing itself as a low tax jurisdiction offering predictability in planning for domestic and foreign firms and individuals, utilising a comfort blanket of more than 60 double taxation treaties.
Modern climate
In the years following the ‘bail-out’ Cyprus worked hard to restore its reputation as a country with an advanced and stable economy. The banking and financial sector underwent radical structural reform emerging better capitalized and more harmonized in its regulation. The economy itself proved to be remarkably resilient with GDP growth bouncing back to outperform both the targets set for it and the EU averages. The strength of this recovery can be gauged by the fact that Cyprus actually exited the ‘bail out’ in 2016 having accessed only €7.5bn of the €10bn facility allocated to it.
Prior to the onset of the Covid pandemic there was a noticeable upsurge in mergers, acquisitions and joint venture activity. Some of this is directly attributable to conditions imposed by the EU in return for support finance but the majority was an indirect product of the various reforms and legislative amendments introduced in recent years creating a coherent statutory framework which embraces EU and international standards. The intervention of the EU in the banking sector significantly increased the level of domestic M & A activity. However, the market for domestic transactions involving a Cyprus entity remained much larger in both value and volume. In most deals the role of Cypriot law firm is to advise on the Cyprus law aspects of the deal as part of a consortia of firms operating under the direction of a main advisor to the client. In 2019 most deal activity took place in the banking, energy, technology and tourism sectors and the provision of professional services was estimated to have contributed 8.2% to Cyprus’ Gross Value Added. During the period 2010-2019 foreign direct investment averaged €24 billion per annum.
As the country’s financial, institutional and regulatory structures have matured, so too has the investment policy of Cyprus governments. Having sought to quickly attract investment into the country following the economic crisis the government efforts initially focused on offering incentives for investment, including a fast track to citizenship. However, alongside this a longer term and sustainable vision for the economy was evolving which focused on exploiting offshore gas, investment in tourism, and a focus on financial services, all of which sat well with the country’s key assets of convenient geographical location, a young, educated population and stable legal and political systems.
Alongside traditional M & A activity, in recent years the corporate and commercial sector has benefitted from the Cyprus government strategy of promoting the financial and professional services sector by positioning Cyprus as an ideal location for regional and international headquarters. It has also tried to promote the island as a high tech and innovation hub. These efforts have resulted in the introduction over time of several incentives including an IP Box regime, favourable tax rates and allowances at individual and corporate level, various investment reliefs and a ‘fast track’ business mechanism for companies of foreign interest. These have met with a degree of success with a number of well-known international corporations choosing to headquarter in Cyprus. Additionally in 2021 the EU recognised Cyprus as one of the five most innovating countries within the block. The country also ranks first in terms of funding per capita awarded from Horizon 2020, the EU’s research and innovation programme and has become the home of the annual REFLECT Festival which is the largest ‘future casting’ conference in the region.
In October 2021 the government, in announcing its new investment strategy, publicly recognised that it sees the future growth of the economy as dependent on sustainable high skilled and high value businesses. The plan focuses on the introduction of new incentives targeted at the areas of high-technology, innovation, pharmaceuticals, shipping and foreign interest owned companies. Many of these incentives were put in place at the start of 2022, the remainder are expected to follow in short order. The ‘incentives’ comply with EU best practice and centre around:
- The IP Box scheme is further enhanced, and significant tax-free allowances are made available for high earning individuals.
- Amendments are made to better facilitate the entry of wealthy and high earning third country nationals and their families and support staff.
- A business facilitation unit has been established. The unit will be responsible for the various services necessary to establish a business in Cyprus.
Current climate
The Covid 19 pandemic clearly impacted the M & A and general corporate and commercial marketplace in Cyprus as it did everywhere else in the world. However, the Cyprus economy as a whole rebounded strongly in 2021 recording a 5.5% growth in GDP largely thanks to a recovery in consumer expenditure whilst the general government deficit narrowed to 1.8% of GDP against a target of 4.9%. It also appeared that some deals had merely been deferred rather than completely dropped. Significant activity was observed in the luxury hotel and tourism sector, the renewable energy sector and the fintech sector.
Notable publicised activity in 2021 included
- Mediterranean Hospitality Venture Limited (MHV) acquired 100% of Park Lane Hotels Limited.
- CPI Property Group SA and Aroundtown SA utilized a Cyprus entity to make a public bid for all of the share capital of Globalworth Real Estate Limited (a Guernsey incorporated real estate company listed on AIM).
- Mintra Holding AS completed a cross-border acquisition of German based maritime digital learning and crew competence management specialists Safebridge GmbH and its Cyprus subsidiary Safebridge Limited.
- Greenmont AIFLNP completed a €15,600,000 acquisition of Watium Emelia SL.
- Brightbridge Real Estate Limited made a R1.75 billion offer to acquire certain assets of RMB Holdings.
The impact of the war in Ukraine on the Cyprus economy and levels of deal activity is as yet uncertain. The principal impact is likely to fall on Cyprus’ tourist sector. Russian tourists generally account for 20% of all tourists and the Cyprus government is now seeking to compensate for this by targeting other markets. There are also significant financial linkages with Russia in terms of Special Purpose Entities which have limited impact on the domestic economy although they will affect demand for legal and financial professional services. The exposure of Cyprus banks to Russia is negligible. However, the geopolitical tensions and uncertainty related to the war have been the catalyst for a significant change in the Cyprus banking sector. One of the three main domestic banks RCB Bank Limited announced it is to transform itself into a regulated asset management company and withdraw from banking activities. It has entered into an agreement with Hellenic Bank Public Company Ltd for the sale of a performing loan portfolio of up to c. €556 million, related funds on the accounts of the corresponding borrowers and related off-balance sheet obligations and is conducting a controlled wind down of its customer accounts.
Despite the above key rating agencies Fitch, Moody and S&P have not downgraded their long-term ratings for Cyprus citing institutional strength, credible government policy, and Eurozone membership as stabilizing factors.
Outlook
It would be extremely optimistic to assume that a second successive year of ‘lost’ tourism will not impact the economy. Across the lower end of the tourist offering, in particular, there is likely to be an upturn in the number of insolvency related merger and acquisitions, and financial restructuring transactions.
On a more positive note, the government appears strongly committed to its new investment strategy and numerous possibilities exist for deal activity in the targeted sectors. In addition to incentives mentioned earlier it has also embarked on several significant supportive actions. These include a comprehensive broadband strategy and digitalisation plan to enable a massive increase in digital connectivity by 2025, an update of the Companies Regulatory framework, the creation of an online platform for innovative, and hi-tech companies, the completion of judicial reform, and a bill for the facilitation of strategic investments. In addition to this, widespread lockdowns during the pandemic have led to a widespread adoption of online and cashless transactions. Those businesses which have fared best during the pandemic, have tended to be those already immersed in digital transformation or those which were able to quickly transform their operations to take advantage of digitalisation. Both are indications that significant opportunities for activity may exist in the Fintech sector which exhibited strong growth in 2020 and 2021. Crytocurrency and RegTech clusters have also shown strong progress.
The acceleration and promotion of large-scale construction projects such as the recently commenced redevelopment of Larnaca Port and Marina is also likely to be linked to an increase in establishment of joint venture vehicles. The government’s desire to promote Cyprus as a regional energy hub has had a similar impact. Total, Shell, ExxonMobil have already set up Joint Venture operations to explore local prospects.
Numerous opportunities for business ventures also exist in relation to the introduction of the EU Green Deal and the attainment of its sustainability objectives. Under the plan, greenhouse gas emissions are set to be reduced with key policies including promotion of natural gas and renewable energy sources, increase in carbon sink, improvements of energy efficiency in buildings, industry and infrastructure, and reduction of emissions in the transport, agricultural and waste sector. Some major international renewable energy companies are already active and seeking acquisitions on the island. There is also likely to be a growth in managed funds specifically targeting sustainability and renewable energy related projects and businesses.
The shipping sector is performing well, and its favourable tax tonnage scheme has been extended until at least 2029. Further Cyprus has committed to the ‘greening’ of the industry, and this too is pushing boundaries in developing new technologies within the ambit of the EU Green deal and sustainability initiatives.
All of these initiatives and developments are filled with potential for market growth and activity, and therefore even in these challenging times, the outlook for legal and other services to support M & A transaction opportunities in Cyprus is promising.