Before delving into Cyprus’ contemporary corporate and commercial landscape, it is essential to understand the historical context that has shaped the country as a business hub. The island’s strategic location has made it a sought-after territory throughout history, with influences from various civilizations. The British colonial era, which lasted from 1878 to 1960, further impacted Cyprus’s legal and economic structures.
In 1960, Cyprus gained independence, and its journey towards establishing a stable and thriving business environment began. The subsequent decades saw the development of a diversified economy, with a focus on services, trade, and tourism. Joining the European Union in 2004 and adopting the euro in 2008 marked significant milestones, reinforcing Cyprus’s position in the global economic arena.
An ideal relocation destination
Cyprus boasts a diverse economy that has recently been upgraded to investment-grade level according to all major credit rating agencies. This was made possible following a two-notch upgrade by Moody’s in September 2023. Notably, the DBRS agency rated the country one notch higher, setting it apart.
Key growth sectors in Cyprus include ICT, investment funds, entrepreneurship & innovation, tourism & hospitality, shipping, renewable energy, higher education, and filming. Over the past decade, Cyprus has cemented its status as a sought-after relocation option for global corporations operating in these sectors and seeking to establish their headquarters within Europe. This can largely be attributed to the country’s favorable tax system, robust business infrastructure, strategic geographic location, and highly skilled talent across industries.
Cyprus’s tax regime is a significant driver of its appeal to global businesses.
The country’s tax system is designed to encourage investment and promote economic growth. A range of incentives contribute to the creation of a tax-efficient environment for businesses operating in Cyprus. Some of these incentives include:
- Cyprus has one of the lowest corporate tax rates in the European Union, currently standing at 12.5%. This competitive rate, coupled with an extensive network of double tax treaties, makes Cyprus an attractive jurisdiction for international business activities.
- The Notional Interest Deduction (NID) on new equity allows companies to deduct notional interest on new share capital. As of 1 January 2020, the premium for the NID interest rate is set at 5% rather than the previous 3% rate. The NID cannot, however, exceed 80% of the taxable profit generated by the activities financed by the new equity (as calculated prior to the NID).
- The Intellectual Property (IP) Box scheme is a tax incentive program designed to encourage companies to develop, use, and exploit intellectual property in Cyprus. Under the scheme, qualifying companies can benefit from a reduced corporate tax rate on income generated from qualifying intellectual property. The qualifying intellectual property typically includes patents, trademarks, copyrights, and other similar intangible assets.
The banking and financial services sector also plays a pivotal role in Cyprus’s corporate and commercial landscape.
The island boasts a well-developed and stable banking system, with both local and international banks operating within the country. The Central Bank of Cyprus, established in 1963, serves as the country’s central monetary authority, overseeing monetary policy and financial stability. Cyprus has positioned itself as an international financial centre, attracting a diverse range of financial institutions, including commercial banks, investment firms, and insurance companies. The sector has evolved to provide a comprehensive suite of services, from traditional banking products to sophisticated financial instruments and wealth management services.
The adoption of the euro and adherence to EU regulatory standards have further enhanced Cyprus’s standing in the international financial community. The island’s financial services sector operates under a robust regulatory framework, ensuring compliance with EU directives and international best practices. The Cyprus Securities and Exchange Commission (CySEC) regulates the securities and investment services market, contributing to the sector’s credibility and integrity.
Corporate governance and legal framework
Cyprus’s legal system is based on English common law principles, providing a familiar and transparent legal environment for investors. The Companies Law, Cap. 113, as amended, governs the establishment and operation of companies in Cyprus. The Cyprus legal system ensures protection of shareholders’ rights, with mechanisms in place for dispute resolution and corporate governance. Companies in Cyprus typically adopt a one-tier board structure, with a board of directors responsible for the overall management and decision-making process. The emphasis on accountability and transparency aligns with international standards, fostering investor confidence.
Furthermore, Cyprus offers an efficient and streamlined company registration process. The Cyprus Registrar of Companies, operating under the Ministry of Energy, Commerce, and Industry, oversees the registration and regulation of companies. The process is known for its simplicity and speed, facilitating swift establishment and commencement of business operations.
Crisis and transformation
The 2013 financial crisis had a profound impact on Cyprus, leading to a banking crisis and the imposition of capital controls. 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 exited the ‘bail out’ in 2016 having accessed only €7.5bn of the €10bn facility allocated to it.
While Cyprus continues to make significant progress in its recovery, the process remains ongoing. Additionally, the continued challenges facing Cyprus including the war in Ukraine, inflationary pressures and an energy crisis, has led to the implementation of a series of initiatives aimed at transforming Cyprus into one of the best places to live, work and do business in.
Outlook
Vision 2035 Cyprus
Vision 2035 is a long-term strategy for sustainable growth for Cyprus. Commissioned by the European Commission’s DG REFORM, a long-term plan to realize Cyprus’ Vision 2035 was outlined in a strategy document prepared by PwC Cyprus in collaboration with PwC’s UK’s Economics team. The plan describes the framework for transforming the country’s current economic model to address the global and local challenges of the future. The plan seeks to achieve the following:
- A robust government infrastructure serving citizens and businesses of any size through a digital platform. The regulatory bodies will maintain an open, transparent, and fair marketplace for both local and foreign businesses supported by an efficient, streamlined judicial system.
- A thriving, diversified economy with high and sustainable growing levels of productivity and innovation. The economic cycle will be significantly less reliant on natural resources and underpinned by the principles of digitalization and a greener economy.
- A world-class education system, a top-tier health care system, and a society that adheres to the rule of law, combats corruption, and provides equal access to opportunities for all sustainably.
Projects & initiatives
Construction
The acceleration and promotion of large-scale construction projects like the €1.2 billion redevelopment of Larnaca Port and Marina commencing in 2024 and the €856 million large-scale development project in Limassol’s Agia Fyla region that will include world-class educational facilities and a leading business park infrastructure are 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.
Renewable energy and environmental sustainability
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. In fact, Cyprus plans to double the share of renewable sources (23%) in the period of 2021-2030, and according to the Cyprus Renewable Energy Roadmap (CERA), the country will be able to produce 25% to 40% of its total electricity coming from solar power by 2030. 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.
Shipping
The shipping sector continues to perform well, and its favourable tax tonnage scheme was 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.