Situated between Europe, the Middle East and Africa, Cyprus has historically acted as a hub for foreign investors who want access to these markets. Since its 2004 accession to the EU, of which it will hold the presidency in 2012, Cyprus has been actively playing on its geographical advantages by transforming itself into a regional hub for shipping, accounting, banking and, more recently, Islamic finance.
According to data from greenfield investment monitor fDi Markets, the leading sector for foreign investment into the country was financial services, making up 26% of recorded projects. The top source country for these investments was France, followed by the UK and Greece.
Projects into the country had been growing steadily up to the global financial crisis but much like the rest of the world, these fell off considerably in 2008. However, according to the Central Bank of Cyprus, FDI came back in force in 2009, with €3.62bn invested, up dramatically from 2008’s figure of €1.2bn and 2007’s €1.63bn.
Much of this was due to Cyprus playing on the strength of its shipping industry, which makes up 4% of its GDP and has traditionally been one of its most important sectors. Cyprus’s registry ranks as the 10th largest merchant fleet globally, and the third largest in the EU, with more than 2170 vessels and a gross tonnage of 43 million. As such, the country has recently enacted several reforms designed to encourage shipping firms to set up businesses on the island and provide incentives to register vessels on the island.
Reforming its shipping industry has been a long process for Cyprus. It began in earnest in 2004 after the country became an EU member state. Thomas Kazakos, director-general of the Cyprus Shipping Chamber, explains that it was an arduous process that was mainly designed to put the country’s rules and regulations in line with those of Brussels, but also with the intention of opening the country up to more foreign investment.
“We have always operated a tonnage tax system because it is more predictable, unlike corporate taxes. But since 2004, we have had our system reassessed and now approved by Brussels. The new system will allow Cyprus to maintain its existing clientele and expand it even more,” adds Mr Kazakos.
Called 'the Cyprus tonnage tax system', it was ushered in with the Merchant Shipping Law of 2010. The new system covers the three main maritime transport activities, which are ship owning, ship management and chartering. It offers several new income tax exemptions and maintains tonnage tax rates that will make it competitive in the EU. There are no taxes on profits from shipping operations. Ultimately, the system is designed to make taxes more secure and calculable for Cyprus-based shipping firms. Mr Kazakos admits that jurisdictions outside the EU can offer lower rates, but as far as competing in the EU and the rest of the world, he believes Cyprus is still well positioned.
“We are not the cheapest, but the main thing is that we are an open registered regime, so you don’t have to be a Cyprus national to own and register ships in Cyprus. We can expand the law of the EU to owners and operators around the world. The new system is similar to the old one, but it is upgraded and gives wider eligibility standards. More companies can benefit by being eligible,” adds Mr Kazakos.
For now, it appears that the laws will remain intact for the foreseeable future. It took the country nearly six years to put these reforms in place, so the current attitude is to wait and see how the system pans out, and then make any necessary changes.
Having said that, Mr Kazakos points out that to remain competitive Cyprus must be alert and willing to make changes if needed. While expressing satisfaction with the current system, he also highlights areas he thinks could be improved.
He is very interested in making Cyprus’ shipping industry more environmentally friendly. While he believes shipping is far cleaner than many other transport industries, Mr Kazakos says that Cyprus Shipping Chamber is committed to reducing its emissions as much as possible, and he is supportive of legislation that would ensure this. Outside of shipping, the country has been an active user of solar energy, of which it claims is used by 90% of its households and commercial buildings. In 2009, the government allocated more than €20m to a fund that will support renewable energy sources.
The pirate problem
However, one area of particular concern is security, amid a growing number of increasingly high-profile pirate attacks. Mr Kazakos is quick to highlight that the shipping industry is crucial to the global economic recovery and, by his calculations, shipping affects 95% of the world’s economy. Therefore, he reasons, this is an issue the international community must take more seriously.
It is estimated that piracy causes worldwide losses to the shipping industry of $13bn to $16bn per year. In 2006, the International Maritime Bureau recorded 239 pirate attacks, and this rose to 309 in 2009. While most of the piracy has taken place in waters far from Cyprus, it nonetheless has an impact on the entire industry.
Mr Kazakos says: “You are looking at a group of people who realise that they can become multimillionaires with only a few guns. There is little incentive for them to stop. We are grateful that governments are recognising that it is a problem, but there is more that can be done. We are all for more drastic interventions by governments.”
One problem he highlights is that it is increasingly difficult to prosecute pirates. Several governments claim that they are able to arrest the pirates, but then have to release them because they lack the jurisdiction to do more than deport them. He believes that there needs to be some sort of system whereby governments can take punitive action, and is hopeful that this will happen soon. Mr Kazakos also hopes that governments will enhance their naval and air support of ships at risk of piracy.
He says: “The problem must be resolved by a proper legal framework. We have been lucky here and at the national level the Cypriot government is listening to our concerns. It has accepted that shipping security is not a political issue and we have a good relationship with it.”