For a number of years, Cyprus has been considered a popular location for foreign investment. Its status as a former British colony and its stable tax system has proved to be an attractive opportunity for overseas investors, but there’s much more to this island than investment opportunities.

An array of important factors contribute to the island’s success. In addition to a European environment, low cost of living and low crime rates, investors in Cyprus benefit from its double taxation treaties and the lowest tax rates in Europe. Cyprus has also previously been commended for the stability of its tax laws and is well known for having the most attractive European tax regime.

Secret to success

Deloitte is one of the largest and fastest growing professional organisations in Cyprus and have recently celebrated 50 years of operation in the country, providing tax, audit, consulting and financial advisory services to both public and private clients.

Pieris Markou, tax practice leader for Deloitte Cyprus, believes there are a number of secrets to Cyprus’ success and explains the island’s appeal when it comes to attracting foreign investors.

“I think in terms of history, Cyprus has always had a friendly approach towards the foreign investor. Historically it’s hard for us being an island and having to rely a lot on tourism and services. Certainly tourism is an area which Cyprus is investing but we’re also encouraging direct foreign investment to the island as a route for investment in the regions.”

“Over the last 30 years, Cyprus has shown that it is a country that foreign investors can rely on, with a market which is stable and reliable. The confidence that the country shows to the international investor has been a main contributor to the years of growth in the Cyprus economy.”

Mr Markou is clear to point out that Cyprus’ well publicised low taxation rate of 10 percent is not the only reason it has been popular with the foreign investor.

“It’s not just the low tax rate; having a low tax rate is not enough. This has been proved through other European countries that also have a low tax rate, trying to attract foreign direct investment and failing. We have succeeded because we have the combination of many factors which appeal to the investor; a stable economy, reliable tax system, our exchange of information agreeements, as well as low tax rates and double taxation treaties.”

Appealing tax systems

Cyprus has both the lowest income tax and VAT rate in Europe and an extensive network of double tax treaties.
The double tax treaty network extends to 45 countries and ensures the investor is protected from double taxation on income earned in any of the two treaty countries. Cyprus also allows tax exemptions in certain circumstances, for example, profits from foreign branches of Cypriot companies, profits from the disposal of shares and interest paid from Cyprus are all exempt from taxation.

This appealing system received a further boost in 2004 when Cyprus became a member of the EU and in 2008 when the euro was introduced. This provided a turning point for the island, thrusting it into the common market and alerting European investors to the country’s tax stability.

Pieris Markou believes, “Joining the European Union proved that investors can invest without any fear of unexpected changes in both the tax and legal framework because being part of the EU there are certain commitments that you need to adhere to.

“EU membership has built investor confidence as they are entering a country that is subject to monitoring by the EU. It is again an indication of the stability of the system as we cannot really do anything without reporting what we are doing to the EU.”

Structured banking system
The requirements from the EU are followed strictly by the industry, encouraging an efficient and influential banking system.

As a former British colony, the Cypriot banking, political and legal systems are based on those long established in the UK, continues Mr Markou, “Because of the 30 years of promoting this type of overseas investment, Cyprus has managed to build a good banking and financial services industry whereby we are following the EU and British standards in terms of banking and financial services. We follow the directives within the EU and our central bank is an independent body which looks after the banking system.

“We have managed to keep the good things inherited from the UK, which means we have a legal system that people can trust, are familiar with and because of political stability the legal framework ensures consistency without unexpected changes.”

Legal restructuring
Recent changes in taxation law have brought amends to the system which will, according to Pieris Markou, further cement investor confidence and make the island an even more attractive investment opportunity. “There was a discussion which took place between the Cypriot government and the private sector and we decided to make some changes in the tax legislation so that a fund which is registered in Cyprus will take advantage of the Cypriot tax law and at the same time will be able to use the double tax treaties.

“This is a new approach taken by Cyprus and we are hoping these changes will encourage the use of Cyprus in fund transactions.”

The Freedom of Information influence
The recent changes with respect to the exchange of information has further improved the relationship between possible investor countries and has kept the system consistent with other nations.

The new law has lead to increased business and investments from countries that had previously declined to invest and has also seen Cyprus’ removal from some countries’ blacklists.

Pieris Markou explained: “both the government and the private sector have agreed that the way forward for Cyprus would be full transparency through the exchange of information. The government took the decision to change the law and allow the exchange of information between tax authorities when there is a specific condition that needs to be satisfied under the double tax treaty.

“This has helped Cyprus remove itself from blacklists in various countries including those in Italy and Russia. We now have a law that allows us to have full transparency, to exchange information and are taking a very serious approach to it.”

Pieris Markou also highlighted a benefit for Cyprus from the changes with respect to the exchange of information because without a law change, the country may not have been able to sign any new treaties and may even have lost some existing treaties.

From blacklist to whitelist
The changes with respect to the exchange of information ultimately lead to the island being removed from Russia’s blacklist which improved relations and removed any uncertainties between the two countries. 

The Cyprus government together with the private sector battled for more than 12 months to get Cyprus removed from the blacklist, which was creating uncertainty for Russian companies investing on the island.

 “Russia is a big market for Cyprus and its good both countries have agreed on the protocol which will remove Cyprus from their blacklist.”

Changes in legislation have also added to the OECD’s decision to include Cyprus on their whitelist in 2009 for implementing internationally agreed tax standards.

In 2002, Cyprus changed its legislation to coincide and satisfy requirements to join the European Union and at the same time, make sure no harmful tax practices were being exercised.

“It is very beneficial to be included in a list of countries that were considered by the OECD to be serious about tax transparency. Cyprus has proven that it has a serious attitude towards the foreign investor and we are a country who is committed to be considered one of the serious players in international tax.”

However, the future is an emerging market, with Cyprus potentially becoming a much bigger player in international taxation and with Deloitte aiming to attract investment from the emerging markets of China and India, the whole face of the financial world could be set to change and according to Pieris Markou, Cyprus could be set for a further investment boost.

“Cyprus would be an attractive location for investors from China, wanting to invest into the European Union. Cyprus certainly, given its geographic location and the efficiency of its tax system can be a point of interest for outbound investors.

“Without doubt we can see Cyprus in the immediate future being used mainly for outbound investments from China and both inbound and outbound for India.

“The importance with China is that we need to make them aware of the benefits of Cyprus and this is the challenge that we are currently facing being a small island. We are hoping through the Deloitte network we can promote Cyprus to potential investors.

“It’s something that I believe there is a lot of scope that’s gradually going to pick up once the Chinese are more confident in the overseas market.”

But will Cyprus maintain its stability throughout these changes and keep its place at the forefront of the foreign investment market?

The simple answer from Pieris Markou, “definitely”.