The Cyprus government is heavily promoting the country’s credentials as a location for both company regional headquarters and as a bridge between the EU and the increasingly important markets of the Middle East. In addition to service industries such as banking and ship management, the government is hoping to attract FDI in high-tech areas such as IT, biotechnology and healthcare.

To bring in more FDI since EU accession, Cyprus has liberalised rules for both EU and non-EU companies. Foreign companies can now invest freely in most areas of the economy without restriction.

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The next important step for Cyprus will be to join the eurozone, which is scheduled for January 2008 and is expected to make the country even more attractive to foreign companies. In the meantime, Cyprus boasts a favourable tax regime with a uniform corporate rate and double taxation treaties with more than 40 countries.

Legislation change

“In the past there were different tax rates for foreign and Cypriot businesses but this difference was eliminated when tax legislation was amended so as to be harmonised with EU directives,” explains Theodoros Philippou, general manager of the Institute of Certified Public Accountants of Cyprus. In 2003, the foreign corporate tax rate was raised from 4.25% to 10%, with the sole exception being the shipping industry, where the tax rate has remained at 4.25%, or an alternative choice of a tonnage tax.

A proposed set of tax reforms will involve promoting the mutual fund sector. The private sector has come up with recommendations that have been submitted to the Ministry of Finance, and the legislation should be passed either this year or next. “This mutual fund legislation will help Cyprus to compete with countries such as Luxembourg, Ireland and the Channel Islands,” says Mr Philippou.

High-tech industries

In addition to financial services and shipping, Cyprus is working to develop high-tech industries such as biotechnology and IT.

“One hundred per cent ownership is allowed, with a few small exceptions such as media,” says Nelly Koulia, senior commercial and industrial officer at the Foreign Investors Service Centre. The centre operates under the auspices of the Ministry of Commerce, Industry and Tourism, and functions as a one-stop shop for foreign-based companies that are interested in investment opportunities in Cyprus.

“Our priority is to attract high-tech and knowledge-based industries,” Ms Koulia says, and emphasises the well-educated workforce as one advantage that Cyprus has to offer foreign companies. “Wage costs for graduate-level employees are still relatively low in Cyprus,” she adds.

Cyprus has a very high proportion of university degree holders, with more than 70% of secondary school graduates proceeding to tertiary education. And, although it has a high per capita GDP for a new EU country – C£9477 ($16,200) in 2004 – and is not a low-wage economy, the comparative salaries of graduates are competitive. Well-known names that have entered Cyprus in the past few years include Bank of Beirut, Starbucks, UK consulting firm Regus, UK software company GFI, Lebanese telecoms company Scancom and German retailer Lidl.

In the services sector, in addition to tourism concerns, the three main categories of foreign firms located in Cyprus are trading companies, ship management and ownership companies, and financial services companies. The usual strategy is to use Cyprus as a support office, making use of the country’s impressive network of legal, banking and accounting firms.

Last autumn, the EU parliament passed the eighth directive on auditing, which came into force last month, with changes that were prompted by the global accounting scandals of recent years in both the EU and US.

“From January 2005, we started audit monitoring for audit firms,” says Mr Philippou. This is ahead of the EU schedule, in which each EU country has two years to introduce its own legislation to comply with the Audit Directive, with a deadline some time in spring 2008.

Cyprus has already introduced monitoring for international standards of auditing to help attract more foreign investment, and the monitoring process has been outsourced to UK accountants.

There are still many offshore companies registered in Cyprus because it remains a tax-efficient location for holding companies, typified by the many Russian holding companies that are registered in the country. This causes Cyprus to show up in statistics as one of the major sources of foreign investment into Russia.

One impact of EU accession is that Cyprus has had to focus more on the quality of companies being set up, and it has treated activities such as money laundering much more severely.

“We had to become more transparent to comply with EU and Organisation for Economic Co-operation and Development codes of conduct, and now we see ourselves competing with jurisdictions such as Ireland, Luxembourg or Malta,” says Marios Paraskeva, president of the Association of International Banks.

“We are an attractive location for holding companies, which after paying 10% corporate tax can pay dividends without tax being deducted at source,” he adds.

The free-zone area located near Larnaca Airport is a further advantage enjoyed by companies engaged in international commerce. Established to encourage external trade, the free zone offers various incentives in relation to imported goods and goods manufactured on site for export, including abolition of custom duties and taxes.

PPP projects

Significant foreign investment is also arriving via the public-private partnership model for major infrastructure projects, including airports and a new cruise ship terminal.

In 2005, the first such deal was signed by the government, involving a 25-year concession to finance and develop two airports, at Larnaca and Paphos. The winning consortium was Hermes Airports, which is owned by a group of Cypriot and international companies, including Bouygues Batiment International, EGIC Projects, YVR Airport Services, Aer Rianta International, Cyprus Trading Corporation and Aeroport de Nice Côte D’Azur. The project will cost about €550m, and the consortium has been working on putting together a long-term debt package, led by ING, Royal Bank of Scotland, Société Générale and WestLB.

These large infrastructure projects, together with the many smaller investments being made in Cyprus, should help increase the level of FDI from its current levels of about $1bn a year.

The cost of this special report was underwritten by the Ministry of Commerce, Industry and Tourism of the Republic of Cyprus. The writing and research were carried out, independently of the Ministry, by fDi magazine