Elias Neocleous & Co LLC > Limassol, Cyprus > Firm Profile

Elias Neocleous & Co LLC > Firm Profile

The firm: Elias Neocleous & Co LLC (ENC) is among the largest firms in southeast Europe and the Eastern Mediterranean, with offices located in Limassol, Nicosia, Paphos, Brussels, Budapest, Kiev, and Prague. It is renowned for its international expertise and jurisdictional knowledge across a broad spectrum of practice areas, spanning all major transactional and market disciplines, to bring strategic solutions to global clients operating in key industries worldwide. The firm is generally regarded as a regional leader, with a particular forte in cross-border work. It advises international clients on all aspects of Cyprus and European law and handles the largest and most demanding cross-border assignments. It also acts for leading companies from global jurisdictions including Asia, the Middle East, India, USA, South America, and China, among others, as they enter the European market.

ENC is widely recognized for its pioneering tech law department comprised of a dynamic team of legal engineers and digitally literate lawyers who specialize in assisting startups and technology companies with all their legal concerns. Additionally, the firm’s ongoing pursuit of merging technology with legal services through the power of advanced AI capabilities to optimize legal service delivery has garnered significant recognition within the broader business community in Cyprus and abroad.

Organizationally, ENC is committed to continuous investment in its human resources and its infrastructure to provide clients with service of the highest quality.

Areas of practice
Admiralty and shipping: Deals with the registration of vessels and aircrafts under the Cyprus and other flags, as well as all aspects of ship finance. It advises on ship sale agreements, charterparties and other types of contracts. It also handles disputes and execution of judgments against assets of shipping and aviation companies worldwide including ship arrests.

Banking and finance: Advises on the Cyprus aspects of major cross-border
finance transactions, including all types of syndicated lending, asset finance and leveraged and acquisition finance. It has strong links with commercial and investment banks, trust companies and underwriters. Clients are appreciative of our ‘assistance and responsiveness.’

Financial services and regulation: Deals with the EU and Cyprus applicable framework on (i) banking and payment services, including those under the banking recovery and resolution regime and the deposit guarantee scheme, (ii) investment services and activities under the Markets in Financial Instruments Directives (MiFID II and MiFIR) as implemented in Cyprus, including under directives and circulars issued by European Securities Markets Association (ESMA) and the Cyprus Securities and Exchange Commission (CySEC); (iii) the EU and Cyprus framework on listed equity and debt securities under the Prospectus Regulation and respective local laws, the Public Offer and Takeover Bids laws and regulations, the Market Abuse Regulatory and regulatory requirements regarding market disclosures and transparency towards regulators as well as capital markets transactions; (iv) the structuring, authorization, supervision and transactions of collective investments, such as alternative investment funds and their managers and UCITS and (v) the regulation of insurance and reinsurance undertakings and intermediaries, under the applicable Cyprus regime.

Corporate and commercial/mergers and acquisitions: Advises on formation, corporate management and governance of companies; formation and use of trusts; mergers and acquisitions of companies in Cyprus and abroad including private and public mergers, takeovers, demergers and disposals; joint venture agreements; corporate reconstruction and reorganisation, inward and outward domiciliation of entities, capital raising transactions and offerings, private equity, stock options and purchase and sale of securities work.

It has particular expertise in investment via Cyprus to and from Central and Eastern Europe, Asia, and South America.

The department also advises local, multinational, and international companies on matters of licensing, procurements, e-commerce, labelling, agency and distribution, consultancy services, consumer protection, concession and operating agreements, and the department specialises in regulatory matters relating to electronic communication, information technology, pharmaceuticals, and data protection (GDPR and NIS Directives).

European Union and competition law: Advises multinational enterprises investing in Cyprus on anti-trust and merger control law issues under domestic and EU competition law and also on distribution agreements and cartel investigations. Our firm has experience with the government and the Competition Authority and a deep understanding of local competition regulation. We offer our clients a tailored service. We also act as counsel to several administrative and quasi-governmental bodies, thus strengthening our relationships with the country’s key stakeholders in competition law.

Employment law: ENC is skilled at advising senior employees as well as major national and multinational companies. It also advises the British High Commission on employment matters, and it is the exclusive representative in Cyprus of the Employment Law Alliance Network, the largest and most prestigious network of labour and employment lawyers, with more than 3,000 attorneys in over 100 countries. The team has particular expertise in drafting employment contracts and related documentation as well as in advising on a broad range of employment law matters, including termination of employment, employee rights and obligations, statutory benefits, employee incentive schemes, transfer of undertakings and protection of employees (TUPE), health and safety at work, collective bargaining, etc.

Energy: Our staff have more than 20 years’ experience in advising potential investors in a wide range of energy projects ranging from onshore and offshore oil and gas exploration operations to renewable energy projects. We have up-to-date knowledge and experience of the relevant national, EU and international legal and regulatory environment applying to all types of energy projects. Our specialists in public procurement have extensive experience in assisting clients in preparing and submitting tenders to the relevant government authorities and in subsequent negotiations and finalization of contracts. Our aim is to help clients identify profitable opportunities and exploit them as effectively as possible. We have assisted several leading participants in the energy market with projects such as applications for exploration license’s, public procurement procedures and the negotiation and drafting of all types of energy agreements, including public contracts with joint operation agreements and energy suppliers or drilling contractors. Our unmatched tax expertise allows us to advise clients on the most tax-effective structuring arrangements, taking account of the international nature of the industry and the various tax regimes involved. In addition, we have extensive experience in dealing with the regulatory bodies involved in the monitoring of compliance with the requirements of Cyprus and EU environment, energy and oil and gas legislation.

Intellectual property: Advises on the acquisition, registration, and protection of all types of intellectual property. The firm specializes, inter alia, in advising international clients on the protection and exploitation of intellectual property using Cyprus-based structures to benefit from Cyprus’ advantageous IP taxation regime. Existing clients include clients with household brands in business sectors which include software, electronic service payments, pharmaceutical products, sports, and personal care products.

Technology, privacy and cybersecurity: The ENC team consists of professionals from a range of disciplines marrying strong technical and legal skills with heightened business acumen and extensive ‘hands on’ experience. Staff are qualified in Cyber security, ethical hacking, digital forensics, GDPR compliance and Cypriot, EU and international law. They approach cyber as a corporate governance risk and advise on the full spectrum of cyber issues. This includes directly helping clients understand and mitigate cyber risks, both in their ‘business as usual’ operations, and when engaging in activities which raise specific cyber concerns. They also regularly work alongside other practice departments to provide comprehensive solutions for the numerous issues that may arise during business transactions.

Litigation and dispute resolution:  ENC is home to one of the strongest litigation and dispute resolution departments in Cyprus. We are the law firm of choice for prestigious clients seeking assistance with international and domestic litigation and have been involved in many recent high-profile cases. We are also highly experienced in all forms of alternative dispute resolution. Our client base includes leading international law firms (and their clients), leading financial institutions, investment firms, national and international business corporations, and private individuals.

Uniquely in Cyprus our team is divided into four specialist sectors under the guidance of partners Antonis Glykis, Anna Demetriou, Chrysanthos Christoforou and Christos Melides. This separation allows for the development of specific expertise in each sector and plays an important role in ensuring that we achieve the best possible outcomes for our clients.

Infrastructure and project finance: The firm assists clients on landmark developments, global PFI and PPP projects. Advice is specifically tailored to dovetail with the corresponding commercial, banking and finance and tax aspects.

Tax planning and advanced business structuring:  ENC has one of the largest and most experienced law firm tax department in Cyprus and is the recipient of prestigious accolades and tier 1 rankings in recognition of its expertise in this domain. We have an excellent reputation for delivering high quality ‘up to the minute’ advice and planning. Our tax and tax planning resource includes specialists with legal, accounting, and financial backgrounds. This combination together with close cooperation with other teams across the firm enables us to provide our clients with robust, commercial solutions to their tax problems.

Our clients include international law firms, large domestic and international corporations, financial institutions, high-net-worth individuals, and government organizations. We have a marked expertise in cross-border transactions and associated tax planning issues and have been involved in numerous projects across Europe, Asia, and the Americas. We are well versed in contentious issues and corporate tax policy issues. The expertise shown in our international work is mirrored in our domestic tax work where we also have significant capacity and experience. Our clients say, ‘my sincere appreciation for your remarkable attitude, which is very rare.’

Real estate: Our real estate specialists deal with all matters relating to freehold and leasehold property, including transactions and disputes involving commercial and residential property. The department advises both individual and corporate clients. Activities include dealing with all issues related to real estate, including acquisition and sale of immovable property, legal due diligence for property acquisitions, estate planning and, particularly for HNWIs, succession issues.

Immigration: Our immigration team has a long record of successfully dealing with all matters relating to immigration law, applications for immigration permits, permanent residence permits, employment permits and visas. The department advises both individual and corporate clients. It provides an integrated service, optimizing tax and other benefits in conjunction with the client’s advisers in his or her country of origin and anywhere else they may have financial interests. Areas of work include citizenship applications, employment permits, permanent residence permits, immigration permits and visas.

Private client: ENC has an established record in providing high quality services to private clients and high-net-worth individuals. Both our department and our department head, Elias Neocleous, are ranked as tier 1 performers by a host of independent rating agencies. Clients derive significant benefit from the firm’s multidisciplinary specialist expertise provided by several departments and offices, in Cyprus and across Europe, ensuring a top-tier ‘one-stop’ service which is specifically tailored to the clients’ needs. Whatever our clients’ objectives are, be they tax minimization, estate planning, philanthropy, or any other goal, our team has the skill set and the experience to allow them to achieve it in a tax efficient and legally compliant manner.

Meet The Team(s)

Banking & Finance Department

Limassol, Cyprus

+ 357 25 110110

View team profile

Employment Law Dept.

Limassol, Cyprus

+ 357 25 110110

View team profile

Admiralty and Shipping Department

Limassol, Cyprus

+ 357 25 110110

View team profile

Litigation and Resolution Department

Limassol, Cyprus

+ 357 25 110110

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Corporate and Commercial Department

Limassol, Cyprus

+ 357 25 110110

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View team profile

Immigration Law Dept.

Limassol, Cyprus

+ 357 25 110110

View team profile

Real Estate Dept.

Limassol, Cyprus

+ 357 25 110110

View team profile

Tech Law Department

Limassol, Cyprus

+ 357 25 110110

View team profile

Tax Planning and Advanced Business Structuring Department

Limassol, Cyprus

+ 357 25 110110

+1

other

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View team profile

European Union and Competition Law Department

Limassol, Cyprus

+ 357 25 110110

View team profile

Intellectual Property Department

Limassol, Cyprus

+ 357 25 110110

View team profile

Lawyer Profiles

Photo	Name	Position	Profile
	Ms Arina Aidonidou	Associate	View Profile
	Ms Annabelle Antoniades	Associate	View Profile
	Mr Alexis Christodoulou	Associate	View Profile
	Mr Konstantinos Kaousliadis	Associate	View Profile
	Mr Filippos Neocleous	Associate	View Profile
	Mrs Katia Papadopoulou	Legal Consultant	View Profile
	Mrs Christiana Pyrkotou	Senior Associate	View Profile
	Ms Theodora Alexandrou	Associate	View Profile
	Mr Katerina Andreou	Associate	View Profile
	Mr Angelos Antonellos	Associate	View Profile
	Ms Maria Aristidou	Associate	View Profile
	Ms Christina Avgousti	Associate	View Profile
	Mr Fabian Cabeza	Legal Consultant	View Profile
	Ms Constantina Charalambous	Associate	View Profile
	Mr Motaher Chowdhury	Legal Consultant	View Profile
	Mrs Elena Christodoulou	Senior Associate	View Profile
	Ms Maria Christofi	Senior Associate	View Profile
	Mr Andreas Christofides	Associate	View Profile
	Mr Chrysanthos Christoforou	Partner	View Profile
	Mrs Anna Demetriou	Partner	View Profile
	Mr Kriton Dionysiou	Associate	View Profile
	Mr Kyriacos Drousiotis	Associate	View Profile
	Ms Marios Drousiotis	Associate	View Profile
	Mrs Aimilia Efstathiou	Associate	View Profile
	Mr Athina Evagorou	Associate	View Profile
	Mrs Elena Fantis	Legal Consultant	View Profile
	Mr Antonis Glykis	Partner	View Profile
	Mr Demetris Gregoriou	Associate	View Profile
	Ms Daphne Ionides	Associate	View Profile
	Mr Johann Jakob	Legal Consultant,	View Profile
	Mrs Marina Joud	Senior Associate	View Profile
	Mr Christos Kafouris	Senior Associate	View Profile
	Mrs Andrea Kallis Parparinou	Partner	View Profile
	Mr Xenia Kalogirou	Senior Associate	View Profile
	Mrs Katerina Krassa	Associate	View Profile
	Ms Ramona Livera	Senior Associate	View Profile
	Mr Christos Melides	Partner	View Profile
	Mr Antonia Monogyiou	Associate	View Profile
	Mrs Kim Alexia Mourtzi	Associate	View Profile
	Mr Elias Neocleous	Managing Partner	View Profile
	Mrs Mariorita Neocleous	Associate	View Profile
	Mrs Eugenia Ortiz Neocleous	Legal Consultant	View Profile
	Mr Michael Pelosi	Senior Legal Counsel	View Profile
	Mrs Louiza Petrou	Senior Associate	View Profile
	Ms Katerina Pillakouri	Associate	View Profile
	Mr Vassilis Psyrras	Senior Associate	View Profile
	Mr Demetris Roti	Partner	View Profile
	Mr Stefanos Sofroniou	Senior Associate	View Profile
	Mr Costas Stamatiou	Partner	View Profile
	Mrs Kyriaki Stinga	Senior Associate	View Profile
	Mr Iasonas Telemachou	Associate	View Profile
	Mr George Tsardellis	Partner	View Profile
	Mr Nicolas Tsardellis	Partner	View Profile
	Mrs Anna Tsyvinska	Legal Consultant	View Profile
	Mr Miltiades Vasileiou	Associate	View Profile
	Mr Christos Vezouvios	Partner	View Profile
	Mr Kyriacos Xenophontos	Partner	View Profile
	Mr Adonis Zachariou	Associate	View Profile
	Ms Aylin Zeybek	Associate	View Profile

Focus On

Banking and finance in Cyprus

Background

Cyprus’ Banking and Finance sector has been transformed in the years following the 2009-2013 economic crisis and subsequent EU bail out. The economic crisis was largely precipitated by over exposure to the Greek economy and sovereign debt and, a severely overleveraged property sector; all factors which resulted in Cyprus banks portfolios containing an unacceptably high proportion of non- performing loans (NPL) some in excess of 50%. In March 2013, the Cyprus Government, in return for EU bail out assistance signed ‘The Economic Adjustment Programme Memorandum of Understanding (MoU).

A key part of the MoU process included the assessment of the needs and weaknesses of the banking system.  Following this, key targets were set, and actions implemented to achieve them.  This included the recapitalization and restructuring of credit institutions as well as the strengthening of the regulatory and supervisory framework of the banking and finance systems.  Whilst the path to achieving these ends was often brutal the effect was to produce local banks and finance institutions which were rationalized, stable, better capitalized and most importantly invested in corporate governance.

Running alongside these changes was a recognition that there was a lack of diversity within the finance sector. For many years bank lending and tax focused corporate structuring had dominated the landscape.  Following the EU bail out a conscious effort has been made to add sectors such as Investment funds,  fintech, cryptoassets and crowdfunding into the mix. The investment fund sector, in particular, showed rapid growth following an overhaul of the regulatory framework.  Assets under management increased from €2.7 billion in 2012 to €11.6 billion in 2022.   Cyprus in 2022 is home to a unique blend of banking and finance organisations.

Covid and Ukrainian war

The Cyprus economy entered the Covid pandemic in a strong position relative to the majority of other EU members. This was also true of its revitalized banking sector which entered the crisis well capitalized and with ample liquidity.  Prior to the Covid crisis the NPL rate, although still high, was reducing and despite the crisis, banks continued to sell off elements of their NPL portfolios.  The pandemic did, however, impact upon the rate of momentum achieved although by the end of 2021 the NPL rate stood at 9.8% of all loans as opposed to 17.5% in 2020 and 27.9% the previous year. 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%. One positive impact of the pandemic has been the acceleration of digital strategies across the country due to widescale lock downs imposed on most of the population.  This has been accompanied by a significant shift to the use of online, card and crypto transactions and away from cash. Overall, the Banking and Finance sector has exhibited resilience and flexibility throughout the crisis.

The principal impact of the Russia – Ukraine war 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 relating to RCB Bank Ltd. Prior to the start of the war RCB Bank Ltd had, with Bank of Cyprus and Hellenic Bank, been one of the three key domestic banks and subject to oversight by the European Central Bank (ECB).

On March 24, 2022, RCB Bank Ltd (RCB) announced that it had taken a decision to transform itself into a regulated asset management company.  In agreement with the ECB Banking Supervision, it ceased entering into new business with clients with respect to both deposits and/or loans from that date.  This followed an earlier announcement that it had 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.  Much of RCB’s business had depended on the Russian market and there were significant outflows of cash from the bank in anticipation of sanctions, at the start of the war.  The escalation of the war and broadening of sanctions increased the uncertainty about its future. The closure was decided on by the European Central Bank’s (ECB) Single Supervisory Mechanism. It was managed smoothly by the authorities and with full co-operation from RCB Bank Ltd, preventing shocks to the Cyprus banking sector and ensuring RCB’s depositors would not lose any money. The move further consolidates the Cyprus Banking market.

Regulation and Supervision

Cyprus is keen to prove itself to be a business-friendly destination which is fully compliant with EU and international laws and standards.  Compliance frameworks are installed across the banking and finance sector and competent authorities, in the form of the European Central Bank, the Central Bank of Cyprus and the Cyprus Securities and Exchange Commission, ensure their smooth operation.

Banking

Cyprus has been a member of the EU Single Supervisory Mechanism since late 2014.  It has enacted all necessary legislation to harmonize banking and finance domestic law with applicable EU directives and regulations.  This includes the 5^th Anti Money Laundering Directive (5AMLD).

Ultimate responsibility for the authorization and supervision of significant EU credit institutions to be incorporated in Cyprus rests with the European Central Bank (ECB). However, the Central Bank of Cyprus (CBC) is designated as the national ‘Competent Authority’ and therefore all applications are submitted via the CBC.  The CBC vets all applications based on their compliance with the criteria contained in the ‘Business of Credit Institutions Laws of 1997 (as amended). Following this it makes recommendations to the ECB. The CBC has sole responsibility for the regulation and supervision of credit and other financial institutions established or registered in Cyprus, for branches or representative offices abroad of those institutions and, of branches in Cyprus of credit and financial institutions established abroad carrying on banking activities and investment and ancillary services and activities. The supervision of branches of credit institutions from third countries which are active in Cyprus remains the exclusive competence of the CBC. Under Cyprus’ AML legislation the CBC is also the supervisory body for banks and persons licensed to provide money transmission services. Moneyval reports have commended the CBC for its AML procedures and supervision.

The CBC exercises the Supervisory Review and Evaluation Process in respect of all Cyprus incorporated credit institutions licensed by the CBC which are subject to capital requirements. It has authority to enter and inspect.  If the CBC ascertains in its examination and supervision of a credit institution that it is not in compliance with the laws, directives and regulations of the CBC, it has powers to impose significant administrative fines and may amend, vary or revoke any license of a credit institution. The infringement by a credit institution of any of the laws and regulations of the CBC may constitute an offence punishable by imprisonment not exceeding five years or a fine of up to 1,000,000 euros.

The CBC maintains a public register of all credit institutions licensed to operate in Cyprus.

Financial Services

The Cyprus Securities and Exchange Commission (CySEC) is responsible for the supervision of operations and ensuring the compliance with all relevant legislation, including the Fifth Anti-Money Laundering Directive (5AMLD)of the following entities:

• Cyprus Investment Firms (CIFs)
• Cyprus branches of Investment Firms (IFs) of other EU member-states
• Tied Agents of CIFs
• Undertakings for Collective Investment in Transferable Securities (UCITS)
• UCITS Management Companies
• UCITS Agents
• Cyprus branches of UCITS Management Companies of other EU member-states
• Administrative Services Companies – Trustee and Fiduciary Service Providers
• Variable Capital Investment Companies
• Alternative Investment Funds (AIFs)
• Alternative Investment Fund Managers (AIFMs)
• Regulated Markets
• Central Securities Depositories (CSDs)
• Central Counterparty Clearing House (CCPs) of over-the-counter (OTC) derivatives
• Trade depositories of over-the-counter (OTC) derivatives

In the context of the implementation of pan-EU requirements, including crypto-asset service providers (CASPs) under the Fifth Anti-Money Laundering Directive (5AMLD), Cyprus recently updated its definition of obliged entities under the Prevention and Suppression of Money Laundering and Terrorist Financing Law 2007 (AML/CFT Law), as amended, to bring crypto asset service providers (CASPs) into its scope. Moreover, Cyprus authorities have also decided that Cyprus CASPs should become approved and registered with the Cyprus Securities and Exchange Commission (CySEC).

In January 2020, CySEC published the “Directive DI87 – 10 on the provisions of crowdfunding services in respect of transferable securities” (“Crowdfunding Directive”).   CySEC’s Crowdfunding Directive relates solely to investment-based crowdfunding through transferable securities and excludes loan-based, reward-based and donation-based crowdfunding. The Crowdfunding Directive comprises a set of secondary rules for investment-based crowdfunding under the Law. It is complementary to MiFID II’s obligations. The Crowdfunding Directive also imposes additional provisions aimed at ensuring investor protection on Cyprus Investment Firms (‘CIFs’) acting as Crowdfunding Service providers. The EU Regulation 2020/1503 expands on CySEC’s Directive and will be fully implemented by November 2022.

Banking and finance activities

Banking and finance activity in Cyprus extends significantly beyond purely domestic regulatory and transactional issues.   Located in the Eastern Mediterranean at the crossroads of Europe, Asia and Africa and, with strong historical ties to the UK, Cyprus is very well-placed as an international business and financial centre. Since joining the EU, it has established itself as the natural portal for inward and outward investment between the EU and the rest of the world, particularly the rapidly growing economies of Central and Eastern Europe, India and China. Its excellent business infrastructure, with a benign tax regime and an extensive network of double-taxation treaties, make it an ideal base for non-EU companies seeking to enter the EU market, and for EU and third-country companies seeking to broaden their horizons, especially with regard to expansion into Central and Eastern Europe.

In view of the above banking and finance transactions frequently involve complex consortia of companies obtaining finance not only from local banks but through major EU, American and Middle Eastern Banks.   Transactions are frequently syndicated and are generally led by major UK and EU law firms.  Cyprus law firms tend to be involved with these deals as local counsel advising on the Cyprus aspects of the transaction and cross-border regulatory issues.  Of particular concern in most cases is the need to ensure the perfection of Cyprus security for these transactions and the registration of charges.   It is common to take security in the form of a pledge over the shares of the Cyprus company as, in general this is easy and cost effective to enforce. A pledge over a Cyprus company’s shares allows out of court enforcement, without the need to apply for a court order.  However, if the Cyprus company does hold assets of value in Cyprus then other forms of security including fixed and floating charges may also be put into place.  Typical services required from local law firms will include:

• Preparation of loan documentation for single-lender and syndicated loans.
• Preparation of security documentation including charges over assets and undertakings of companies, debentures, pledges of share certificates and security assignments of rights.
• Restructuring of existing loans and collateral.
• Refinancing of existing debts.
• Project finance and asset finance.
• Financing of international trade, including letters of credit, negotiable instruments and related matters.
• Construction and project financing; finance leasing.
• Preparation of indemnities and guarantees.
• Preparation of documentation for aviation finance and leasing.
• Compliance with perfection requirements and registration of charges.
• Legal opinions and legal due diligence on proposed transactions.

New entrants to Cyprus, and in particular those from non-EU member states, will also often require advice and support to achieve compliance with the legislation applicable to banks and other financial institutions, including:

• The Cyprus Banking Law, the Payment Services Law, the E-money Institutions Law, the Transfer of Banking Loans Law and the Financial Leasing Law.
• The directives, regulations and guidelines issued by the Central Bank of Cyprus.
• The EU legislative framework on regulatory capital.
• The Banking Recovery and Resolution Directive, as implemented in Cyprus.

Outlook

Cyprus’ economy has, to date, proved remarkably resilient.  Despite the huge negative impact on foreign tourism arising as a result of the Covid pandemic and the Russia-Ukraine war key credit agencies such as Fitch, Moody’s and S&P have not downgraded their long-term outlook for the country (BBB-) and state they regard it as stable. This is due to institutional strength, above average GDP per head when compared with others in the BBB grouping, and government policy credibility backed by eurozone membership. A continued improvement in the NPL position would see the rating improve.  The pandemic has also boosted the digitalisation of the economy significantly with corresponding impacts on the potential of fintech.

At the end of 2021 the government announced a new investment strategy focusing on high value added and sustainable businesses.  In particular it singled out the shipping, pharmaceuticals, biogenics, and high technology sectors along with innovative businesses.  Legislative changes and incentives are already in hand to help to boost the sector with associated opportunities for banking and finance professionals.  The government has also brought forward several significant infrastructure projects to stimulate economic growth such as the  Larnaca Port and Marina redevelopment.  The government is also committed to the EU Green deal and Blue deal and hence investment funds and banks are starting to include ESG factors with some funds and loan portfolios actively targeting or exclusively dedicated to sustainable projects or businesses facilitating sustainability such as solar panel manufacturers.

Other investment opportunities also exist such as distressed loan portfolios, mergers and acquisitions, venture capital funds and projects, high end tourism development and oil and gas projects.

Despite the adversaries encountered in recent times prospects for growth of the banking and finance sector remain – particularly if traditional funders and fintech providers engage in cooperative efforts.

Corporate and Commercial in Cyprus

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.

1. 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.
2. 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.
3. 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.

Taxation for a sustainable future

Background

2022 opened with the government of Cyprus announcing that it was to proceed with the first major tax reform of the Cyprus system in 20 years.  This followed on from several speeches made by the former Finance Minister, Constantinos Petrides, during the latter part of 2021 and against the background of the proposed global introduction of a minimum corporate tax rate of 15 % .   Petrides suggested that the objectives of reform in Cyprus, besides simplification, greater equality and transparency, was the development of a  sustainable economy and linked to that a sustainable environment.  This dovetailed with the announcement of a new government action plan intended to attract ‘sustainable industries’ and specifically those in the areas of high-technology, innovation, pharmaceuticals and shipping. Foreign interest owned  companies were also to be targetted.  Tax incentives formed an important part of the plan and were also viewed as a means of offsetting any possible negative impacts of a rise in corporate tax rates from 12.5 to 15%  which would mainly affect multinational entities.  The majority of these were tax incentives which, along with upgrades to immigration law and the opening of a Business Facillitation Unit, were introduced during 2022.

Defining a sustainable economy

The Cyprus government has an established record of seeking to encourage foreign direct investment into the country in order to diversify its economy. The tax system has played an important role in these efforts and consequently the  Cyprus tax regime has evolved into being one of the most attractive in Europe for individuals, investors and businesses. It currently offers one of the lowest corporate tax rates (12.5%) and the country can boast of a network of more than 60 double taxation agreements. In certain instances in the past, the country has  promoted tax incentives and other schemes which, whilst they performed a ’quick fix’ of the economy by bringing in foreign funds, did little to to build a solid base from which stable and sustainable economic growth could be achieved. However, in the past two decades a general concensus has emerged that the future of the island lies in the construction of an internationally  tax compliant, diversified, highly skilled, high-technology and high value economy.  Success in achieving this would equate to building a sustainable economy offering good living standards for citizens. The progress to date is outlined below.

Tax compliance

Cyprus recognises that if it wishes to attract high quality professionals, investors and businesses to its shores it must establish itself as an internationally tax compliant and fully transparent jurisdiction.

A member of the EU since 2004, Cyprus  bases its tax policy on offering an internationally competitive tax environment that is fully compliant with international best practice and the highest standards of transparency and fairness. Cyprus tax legislation is fully compliant with the EU Acquis Communautaire and EU Directives, and with the code of Conduct for Business Taxation and against harmful tax competition. Cyprus has always been an early complier with OECD and other international initiatives and features on the OECD ‘White List’ of tax jurisdictions.The EU Anti-Tax Avoidance Directives ATAD I and ATAD II entered into force in June 2020 and were applied retroactively as from 1 January 2020 (except for the reverse hybrids provisions which came into effect from 1 January 2022). The proposed ATAD 3 ‘Unshell’ Directive will, once adopted by the European Council also be implemented in line with the timetable laid down for Member States.

Cyprus was also one of the initial 68 signatories to the Multilateral Convention on Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘BEPS’). New and updated double tax agreements are aligned with the latest OECD standards and, on 21 February 2021, in line with the 4^th and  5^th Anti-Money Laundering Directives, the process of collecting beneficial ownership information for the different UBO registers began.  These registers are now operational although public access was put on hold  following a judgment deliverd by the European Court of Justice last November 2022 ruling accessibility of the UBO registers to any member of the general public as invalid.

Diversity

In 1960 the economy of a newly independent Cyprus was highly vulnerable and dependent on agriculture and package holiday tourism.  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, a stable tax and political system.

The first stage in this process was the promotion of Cyprus as a shipping and trading centre.  Following this, the dissolution of the USSR in the late 1990s resulted in Cyprus becoming a portal for investment funds flowing into and our of the former USSR and Eastern Europe. Becoming a member state of the European Union (EU) in 2004 and of the Eurozone in 2008 highlighted Cyprus as a law abiding low tax economy compliant with EU laws.  This led to Cyprus expanding as 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 promoting a corresponding boom in professional services. Finally, 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 spawned new avenues of work and new businesses through new allies.

High value

Within the past decade foreign direct investment policy has matured and the Cyprus government has successfully sought to target more specific types of business and investments for entry into the country. This has resulted in tax policies that favour high quality, businesses and business sectors such as  multi-nationals, shipping, pharmaceutical, fintech, gaming and digital marketing corporations.

Cyprus provides an ideal environment for group holding and finance companies, offering tax neutral flow of dividends from Cyprus to non-tax resident individuals andentities that are not within the list of EU non-cooperative jurisdictions for tax purposes while there is a full participation exemption and no tax on capital gains apart from gains derived from the direct and indirect sale of real estate in Cyprus. The network of double taxation agreements provides excellent safeguards vis-à-vis double, or no taxation and unilateral relief is available for taxes paid overseas if no double taxation agreement applies. The EC Merger Directive has been fully adopted and therefore mergers and approved restructurings can be carried out with full exemption from any form of taxation in Cyprus.

Tax incentives for tax compliant, diverse, high quality businesses.

For several years Cyprus has been introducing tax incentives designed to attract high quality, innovative and niche businesses and professionals to its shores.  Incentives and amendments introduced as part of the new foreign investment strategy build from these.  The key incentives currently in place are summarised below.

A. IP Box Regime – the Cyprus IP Box regime supplements a robust IP legal protection framework by offering tax benefits relating to expenditure arising from research and development (R&D) of a Cyprus company including where that R&D is outsourced to another Cyprus company. It has been approved as being fully compliant with EU standards.  Its principal highlights are:

• 80% of the qualifying profit earned from the use of qualifying intangible assets may be deducted from overall taxable profits. Applying the current Cyprus corporate tax rate of 12.5% to the remaining 20% produces an effective tax rate of just 2.5%.
• As of 1 January 2020, taxpayers disposing of their IP assets have no obligation to prepare a balancing statement. Therefore a (capital nature) disposal of an IP asset, should not trigger any Cyprus tax implications.
• All intangible assets (excluding goodwill), irrespective of whether they are qualifying assets or not, are eligible for tax amortisation (capital allowances) over their useful economic life subject to a maximum limit of 20 years. The taxpayer also has the option not to claim capital allowances in a given year. Where this is the case, capital allowances that have not been claimed in a year are claimed over the remaining useful life of the asset.

B. Personal Tax incentives. These focus on two main objectives.  Firstly they are designed, along with lifestyle factors and various government measures, to attract the necessary high earning and highly skilled executives and personnel to exercise employment in Cyprus.  Secondly they seek to encourage investment in sustainable industries and innovation.  The salient incentives are:

• From 1 January 2022 a 50% deduction from taxable income of remuneration for first employment exercised in Cyprus. This applies to those individuals with an annualised employment remuneration exceeding EUR55,000  who were not residents of Cyprus for a period of 10 consecutive tax years immediately prior to the year of commencement of the employment in Cyprus. This is a once in a lifetime exemption which lasts for a period of 17 years.
• From 26 July 2022 a 20% deduction from remuneration for first employment exercised in Cyprus to an annual maximum of EUR 8550. This applies to individuals who immediately prior to the commencement of their employment in Cyprus were not a resident of Cyprus for a period of at least 3 consecutive tax years and were employed outside of Cyprus by a nonresident employer. The exemption applies for a period of 7 years, starting from the tax year following the tax year of commencement of employment. Individuals who have been granted the above 50% exemption are not  eligible for this exemption.

(Individuals that were eligible to claim the 20% or 50% exemptions that applied prior to 1 January 2022 may continue to claim the said exemption for any remaining period if they are not eligible to claim the exemption for employments commencing as from 1 January 2022. The 20% and 50% exemptions that applied previously were available for a total period of 5 or 10 years respectively for each individual).

• Subject to conditions all expenditure of revenue nature for scientific research and for R&D, is treated as an allowable deduction from taxable income. For expenditure incurred in years 2022, 2023 and 2024, the deduction is set at 120% of the total qualifying expenditure.
• Subject to conditions any amortisation of expenditure of capital nature for scientific research and for R&D, is allowed in full allocated over the lifetime of the asset (maximum 20 years). For expenditure incurred in years 2022, 2023 and 2024, an additional 20% uplift is permitted.
• From 1 January 2017 and applicable up to 31 December 2023 a deduction from taxable income is available for the amount invested each tax year in approved innovative small and medium sized enterprises (either directly or indirectly and subject to conditions). The benefit is restricted to 50% of the taxable income as calculated prior to the deduction (subject to a maximum of €150.000 per year)

C. Corporate Tax. These focus on promoting Cyprus as a tax friendly but fully transparent tax jurisdiction with specific advantages for those engaged in R&D and innovative products.  Since the economic crash they have also sought to encourage companies to build a strong capital base with strong economic substance foundations.   It should be noted that from 31 December 2022 any company incorporated in Cyprus will be regarded as ‘tax resident’ in Cyprus unless it can demonstrate that it is tax resident in another jurisdiction. Companies which are managed and controlled in Cyprus are automatically tax resident in Cyprus.

• Cyprus currently applies a 12.5% flat rate of corporation tax which is one of the lowest in the EU. This is likely to rise to 15% in the future but combined with other measures planned the net effect of this rise on the corporate tax burden is expected to be neutral. The increase to 15% is expected to have an impact on multinationals exceeding a year turnover of EUR750 mio.
• From 1 January 2015 (subject to anti-avoidance provisions) new equity introduced into a company in the form of paid-up share capital or share premium may be eligible for an annual notional interest deduction (NID). The annual NID deduction is calculated as the new equity multiplied by the NID interest rate. The relevant interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 5% premium. The NID deduction cannot exceed 80% of the taxable profit derived from the assets financed by the new equity.
• Benefits derived from IP Box regime.
• Applicable up to 31 December 2023, and subject to conditions, a deduction from taxable income of 50% of the amount invested, either directly or indirectly, each tax year (maximum EUR 150,000 per year) as from 14 February 2022 in approved innovative small and medium sized enterprises.

D. Business Sector Specific.

• Cyprus has for many years successfully strived to be recognised as a major shipping centre.  A key factor in this success has been the existence of a tonnage system of taxation. The application of the tonnage tax system is compulsory for owners of Cyprus flag ships and optional for owners of non Cyprus flag ships, charterers and shipmanagers. Those who choose to enter the Tonnage Tax regime must remain in the system for at least 10 years unless they have a valid reason to exit such as disposal of their vessels and cessation their of activities.  In essence the system offers full exemption to ship owners, charterers and ship managers from all profit taxes and instead imposes tonnage tax on the net tonnage of the vessels. A major boost was provided to the sector when the EU gave its approval, valid until 31 December 2029, to an updated scheme.
• Audio visual. For small companies and individuals a 20% deduction from taxable profits for eligible infrastructure and technological equipment expenditure in the audiovisual industry(10% for medium companies).

Policy results.

The past decade has seen Cyprus growing a solid reputation as a both a technology and headquartering hub.    International giants such as Microsoft, Oracle, SAP, and IBM have had their headquarters in Cyprus for many years, supporting the technological development of the country.  Other international names such as NCR, Kardex, Wargaming, 3CX, TSYS, Amdocs, Exness, Bolt, Melsoft Games, Kyndryl, and Nexters have also migrated to the island.  Cyprus is now viewed as a ‘crypto friendly’ market offering a regulated environment for investors seeking to securely and efficiently trade cryptocurrencies through exchanges overseen by the Cyprus Securities and Exchange Commission.  The anticipated implementation of DAC7 will bolster this perception. The shipping sector has also scored some notable ‘wins’ including international cruise specialist Royal Carribean.

More remains to be done, however, to complete the comprehensive overhaul promised by the Ministry of Finance.  These delays largely relate to the introduction of ‘green’ taxes targetting fossil fuels and carbon emissions.  Plans to introduce such taxes have been understandably derailed by events in Ukraine which have caused significant cost of living rises for all citizens.  The Ministry has suggested that introduction of the taxes is delayed in the national interest rather than dropped. It should also be noted that other government schemes and tax incentives have resulted in strong growth in the renewable energy sector.

Moving forward the Tax Authority is working towards further simplification of administration of the tax system by introducing a single tax platform for all users to replace the current Taxisnet and Tax Portal sites.  Phase 1 of this project, which concerns VAT registered companies and individuals, has already gone live.

The response to the governments new foreign investment strategy from the targeted sectors has been positive to date. Despite the difficulties created by the Covid 19 pandemic and the war in Ukraine the long term signs for the Cyprus economy and its tax system appear to be promising.

Building a justice system fit for the future!

Background

Since gaining independence from the UK in 1960 Cyprus has transformed itself into a successful, modern international business centre. A Member State of the European Union (‘EU’) since 2004, it provides a gateway for investment into and from Europe and, due to its geographic location, it enjoys strong commercial ties with Eastern Europe, the Middle East, Asia and Africa.   A consequence of this is  that commercial disputes frequently involve international parties at corporate and individual level. Additionally, where main court or arbitration proceedings take place in another EU Member State or in a third country with which Cyprus has a bi-lateral agreement, it is common where a link exists, for the parties to look for provisional measures in Cyprus in support of the foreign court proceedings.  The commercial disputes arising are varied and may be linked to issues such as negligence, fraud, contractual disputes, corporate disputes etc. The dominant means of settling large commercial disputes in Cyprus is via litigation. There is often negotiation before and during court proceedings but no legal obligation on or expectation that the parties will engage in such discussions unless they have specifically agreed to do so.  Alternative dispute resolution methods (“ADR”) are a relatively new concept, other than in the construction and co-operative institutions sectors, but they do exist.

Cyprus is primarily a common law jurisdiction with a justice system which is based on the adversarial model. This is a legacy from its period as a British colony.  Much of Cypriot legislation is based on the UK laws in force at the time Cyprus ceased to be a colony.  It is updated and amended regularly to ensure alignment with all relevant EU Guidelines and Directives.  Where there is no applicable Cypriot legislation, English common law and equity are applicable, and English authorities have persuasive force.    The courts are bound by the doctrine of precedent according to which where the common law has been interpreted by the Supreme Court of Cyprus in a particular way, the subordinate courts will be bound by that interpretation.   This offers the parties to a commercial action  the advantages of consistency, predictability and efficiency.

Problems

Despite the apparent attractiveness of the Cypriot legal system to national and international business it has, since the 2003 financial crash, been heavily criticized as an obstacle to the commercial growth of the island.  It should be stressed that this criticism does not stem from a real or perceived lack of integrity or independence on the part of the judges.  Rather, it is directed at the enormous backlog of cases pending before the courts and the average time it takes to get a final judicial decision in any given case.  Whilst the courts are generally efficient in determining applications for interim relief, final adjudication in a case can commonly take between three and six years to obtain. A functional review of the justice system in 2017/18 supported by the EU Structural Reform Support Service (SRSS)[1] found that the length  of court  proceedings was among the longest in the EU, and the level of backlogs in litigious civil and commercial  cases among  the  highest.  Such delays run contrary to the democratic nature of the EU which, along with the Cypriot government, citizens, and businesses adopts the view that ‘justice delayed’ is ‘justice denied’.  Working with the EU and its representative bodies Cyprus determined that problems in the justice system were primarily caused by:

• A large increase in cases and appeals being brought before the courts as a consequence of events linked to the financial crash.
• A lack of support resource within the system. The use of legal officers to support judges in the research and drafting of judgements was very limited.
• An increase in the complexities of the cases brought before the courts.
• An unrestricted right of appeal.
• Reliance on a paper based system with very minimal use of ICT for internal or external communication resulting in significant inefficiencies and, inter alia, a management information deficit.

Next steps

The reaction of the Cyprus government to the findings of the SSRS was twofold.  Firstly It determined that there was an urgent need to begin addressing the backlog of existing cases.  Secondly, it realised that the entire justice system was in need of radical reform.

Case Backlog

To help facilitate a reduction in the backlog the first step taken was a decision to increase the overall capacity of the justice system by increasing the number of judges.  The House of Representatives passed a 2019 budget which included the creation of 32 new judges.  Following on from this a pilot project was introduced in the Paphos District Court.  The project involved the assignment of seven experienced judges to a ‘task force’ dedicated to reducing the case backlog.  The theory was that the experience level of the judges would allow them to assess the cases with relative speed.  The pilot was deemed to be beneficial and was expanded in September 2021 to cover all districts.

In addition, an amendment was made to Civil Procedure Rules which established a ‘small track’ procedure.  This allowed for the introduction of a simplified process for claims under €3,000.  This increased the case management options available to judges by allowing them to give summary judgments on the lower value cases and thereby accelerating the speed with which they could be dealt with.

Reform of Justice System

It was clear from a series of EU backed reviews that a wholesale redesign of the system was required. This required detailed planning and necessitated the involvement and ‘buy in’ of all stakeholders in the system.  Consequently, and with the support of the European Commission for Democracy through Law, a period of comprehensive consultation and review took place with the cooperation of all stakeholders. The result of this exercise was the production, in 2021 of a coherent plan (the Plan) to reform the Cypriot justice system with the object of building a modern, accessible and efficient system.

The key pillars of the plan are:

• • New Civil Procedures Rules
  • Training for judges
  • Reform of the court structure
  • Introduction of technology

In its entirety the plan represents a seismic change for the Cypriot justice system.  The plan is now in the process of implementation and many parts of it feature in the post covid ‘Recovery and Resilience Programme of Cyprus’ (the ‘RRP’).

New Civil Procedures Rules

The Civil Procedures Rules (the ‘CPR’) currently in use are substantially in the form of the Civil Procedures Rules that operated in England and Wales in 1958!   The revision of the CPR is one of the most significant reforms included in the Plan. The project was undertaken by a team of international experts who worked in collaboration with a Rules Committee established by the Supreme Court. A revised set of rules drafted by them was then subject to consultation with the Cyprus Bar Association and the Judge’s Association.  Following this, on 19 May 2021 the new CPR were approved by the Supreme Court.

Within the framework of the RRP the Supreme Court has committed to the implementation of the new CPR for new cases submitted to the courts from 1 September 2023 onwards.  This is expected to have a material impact on the efficiency of the courts.

Training for Judges

Obviously, the introduction of the new CPR and the adoption of new technologies will only be successful if judges are adequately trained in their use.  Consequently, following the enactment of the relevant law 14 August 2020 a training school for judges was established.  This formalises training for the new justice system and will also support ongoing training of judges.  It is envisaged that, in line with many other professions, judges will be required to engage in continual education for their period of tenure.  This move to a higher level of professionalism follows on from a decision taken by the Supreme Court in 2019 to publish the criteria for the recruitment of judges and for the promotion of judges.  Said criteria were set following a study undertaken by the DG Reform of the European commission.

Within the framework of the RRP a commitment was made to ensure that at least 110 judges had completed annual training on the new CPR and various other agreed topics and skill by quarter 4 of 2025.  According to the Ministry of Justice and Public Order this target had already been surpassed by 31 January 2023.

Reform of Court Structure

Prior to the proposed reforms, the Supreme Court sat at the apex of the court system in Cyprus. The Supreme Court  consisted of 13 members, and it exercised both original and appellate civil and criminal jurisdictions. It was vested with authority as:

• • Supreme Constitutional Court.
  • Supreme Administrative Court.
  • Admiralty Court.
  • Appellate Court.
  • A court with exclusive jurisdiction to hear and determine petitions concerning the interpretation and application of the electoral laws.
  • A court with exclusive jurisdiction to issue prerogative writs (e.g. habeas corpus, mandamus, prohibition, quo warranto, and certiorari).

No special leave to file an appeal was required. The Supreme Court, in its appellate jurisdiction, was not bound by any determination on a question of fact made by the trial court, and it had power to review all the evidence, draw its own inferences, hear or receive further evidence and give any judgment or make any order which the circumstances of the case may have justified, including an order for retrial.

The wide jurisdiction of the Supreme Court and the increasingly specialized knowledge required to deal with many of the cases before it created perfect conditions to foster a bottleneck in the justice system.  Changes were required to disperse the workload and ensure that the more complex cases were dealt with by judges with the appropriate skills and expertise.

On 7 July 2022, the House of Representatives voted (the 22^nd amendment) for:

• • The separation of the Supreme Court into two Supreme Courts: one Supreme Constitutional Court with 9 judges and one Supreme Court with up to 7 judges.
  • The creation of a new Second Instance Court, i.e. the Court of Appeal (Appellate Court). The Appellate Court will hear appeals from the First Instance Courts (administrative, civil and criminal) and will be comprised of up to 16 judges. The new Supreme Court will act as a third level appellate court hearing cases referred to it by the Appellate Court.

Additionally,  on 12 May 2022, the ‘Establishment and Operation of Commercial Court and Admiralty Court Act 2022’ (‘the Act’)was passed. The Act establishes a dedicated Commercial Court which will have jurisdiction to hear and determine at first instance all commercial disputes where the amount or value in dispute is at least €2,000,000. Excluded will be claims or counterclaims in personal injury cases and claims, counterclaims or registration of an arbitral award in relation to banking or financial matters. The Act also establishes an Admiralty Court which, once operational, will have jurisdiction to hear Admiralty cases as defined in the  Act.  Given the rising importance of Cyprus as an international business and shipping hub, the introduction of these dedicated courts should significantly decrease the pressure on the Supreme Court.  Also significant is that, prior to the passing of the Act, the House of Representatives approved an amendment of Article 3 of the Constitution of the Republic of Cyprus to allow the use of English in both courts when to do so would be in the interests of justice. Greek will remain the official court language but a Judge of either court may, at the request of one of the parties, allow the use of English, including for the submission of documents and evidence. Since English is more widely spoken than Greek this should again increase efficiency by removing the need to always involve translators and certified translations of documentary evidence.

Originally it was intended that the new court structure should become operational 1 January 2023. This deadline has been extended to 1 July 2023 to allow more time for the recruitment and training of additional judges and court staff.  Whilst targets set out in the RRP have been exceeded the Supreme Court, the Justice Minister and the Attorney General agreed that fully staffing the new courts on the original deadline would have resulted in understaffing of the lower courts.

Introduction of Technology

Widespread introduction of technology into the justice system is essential if the system is to become and remain efficient and effective.  The failure to engage with technology led to a catastrophic situation during the Covid 19 lockdowns where the courts were forced to close because they lacked both equipment and expertise to function remotely.

The Plan therefore incorporated the introduction of an i-justice platform as an interim step towards full engagement in the EU wide e-justice project.  The platform was launched on 21 July 2021 as a pilot version with the objective of streamlining legal processes.  The pilot was judged to be a success and use of the platform for commercial cases became obligatory from 1 February 2021. The full implementation of the system was preceded by thorough training and a sufficient period to allow users to build familiarity with the system.  Additionally, the Cyprus Bar Association (CBA), organized training points in the local bar associations, so that any difficulties of a technical nature could be resolved immediately and effectively.   The I-Justice platform aimed to bring together litigants, advocates, law firms, court staff and clerks, judges, the police and relevant governmental authorities so that justice is administered in an effective and practical digital environment.   The platform allows lawyers to:

1. 1. Submit claims remotely.
   2. Access electronic case files
   3. Pay fees and commissions remotely.
   4. Access up to date information about the progress of ongoing cases.

Supplemental to the above, on 15 September 2021 the Supreme Court issued a court regulation, the so-called ‘e-Justice Procedural Regulation’. This regulates the handling of cases through electronic communication with the Court and allows but does not compel judges to handle cases without any physical presence.

Use of the Ι-justice platform greatly simplified and sped up the operation of the court system in general with specific advantages accruing to those seeking to settle commercial disputes. It has eased the transition to the ‘e-justice’ platform which is expected to be implemented before the end of 2023.  Further modernization will involve the introduction of Digital Audio Recording of minutes to the courtroom.  This is currently being piloted and should be fully implemented by the first quarter of 2025 and again lead to time savings and greater efficiency.

Mission accomplished?

There can be no doubt that important progress has been made in the march to deliver a new justice system that will be fit for future generations.  The President of the Supreme Court and the President of the House of Representatives have both publicly stated that they expect the backlog of cases to be cleared within a 5-year period[2].  Within the RRP framework a commitment has been given by the Supreme Court to meet specific targets in the reduction of cases and appeals which have been pending for more than two years. An ex-President of the Supreme Court has been appointed to co-ordinate and monitor progress.  Some protests by members of the Cyprus were recorded at the introduction of the possibility of summary judgements of small claims but these have not been sustained. The passage of the legislation introducing a new court structure was a significant milestone.  Whilst some disappointment has been expressed at the delay in the implementation of the new courts, criticism has been muted.  The general perception appears to be that it is better to ensure that all necessary resources are in place from the outset than to risk creating new problems to resolve.  It is, however, important for the economic future of Cyprus that the delay does not become a lengthy one. The introduction of formal training requirements for judges can only prove to be beneficial for all stakeholders in the system.  The same is true for the use of technology which finally allows the courts to move out of the 20^th century.

January 2023 saw the delivery of a report following completion of a project related to the establishment of a modern, efficient Court Service to support the management and administration of the courts.  It produced recommendations on re-engineering of procedures, organisational and governance structures and staffing requirements. These recommendations are now under consideration by the Supreme Court and the relevant Ministries and effectively form the final part of the ‘jigsaw’.

Overall then, provided momentum can be maintained, the signs are favourable for the creation of a justice system which is fit for Cyprus in the 21st century and which will be capable of adapting to future requirements.  Given that the EU has stressed that lack of reform is deterring investment in the country it seems unlikely that the desire for change will dissipate any time soon.

Footnotes:

[1] http://www.supremecourt.gov.cy/Judicial/SC.nsf/All/EBD26B775C1A627DC225843F0041884A/$file/Functional%20Review%20of%20Courts%20System%20of%20Cyprus%20(IPA%20Ireland)%20-%20Final%20Report%20March%202018.pdf

[2] https://knews.kathimerini.com.cy/en/news/the-backlog-in-court-cases-will-be-alleviated-in-4-to-5-years https://knews.kathimerini.com.cy/en/news/the-backlog-in-court-cases-will-be-alleviated-in-4-to-5-years

Banking & Finance in Cyprus

Background

The importance of the banking sector to the wellbeing of the Cyprus economy is high relative to that of its European neighbours.  In 2020 it accounted for 6.6% of national Gross Value Added, a figure which contrasted sharply with the Eurozone average of 2.8%.   Cyprus’ Banking sector has been transformed in the years following the 2009-2013 economic crisis and subsequent EU bail out. The economic crisis was largely precipitated by over exposure to the Greek economy and sovereign debt and, a severely overleveraged property sector; all factors which resulted in Cyprus banks portfolios containing an unacceptably high proportion of non- performing loans (NPL) some in excess of 50%. Since then enormous strides have been taken to successfully correct the fundamental supervisory and structural weaknesses of the system and to deal effectively with the NPL issue.  In January 2023 the level of NPL within the system had reduced to 9.6%, the capital bases of the individual banks were strong and liquidity levels high.  This significant turnaround was  acknowledged by the President of the ECB’s Supervisory Council early in 2023 when he noted that Cypriot banks enter the cycle of uncertainty created by the war in Ukraine in a strong position and suggested that there was a real possibility of them being allowed to pay shareholder dividends for the first time since the crash.[1]  It also helped the sector to retain a sense of calm when problems emerged with some European banks early in 2023. Despite these positive changes, however, many challenges remain which must be overcome if the sector is to thrive and service the Cypriot economy into the future.

The Challenges

1. 1. Changing the business model. Historically the banking sector has been one of the biggest employers within the Cypriot economy.  It has also been one of the best payers with an average salary level 80% higher than the national average.  It is a workforce which was structured to operate large networks of local bank branches.  The rise of technology and cultural shifts towards a preference for online transactions and cashless payment have, however, made such networks largely redundant.  Compared with their new FinTech rivals the banks have been saddled with a cost base that requires significant reduction if they are to remain viable businesses.  This necessarily means bank mergers, branch closures and staff reductions via redundancies, early retirements and general attrition.    It also means that banks must embrace digitalisation, mobile banking, personalised banking etc. in order to attract and retain the younger customer whilst at the same time finding a way to satisfy older and possibly less tech savvy customers.  This requires significant investment in staff training and retraining as well as in infrastructure.  It also means introducing new product lines and revenue streams whilst maintaining sensible risk assessment procedures. The challenge is not unique to Cyprus but relative to its European and UK counterparts the Cyprus banking sector was slow to recognise it and begin implementing the necessary changes.  It also exists in a country where its main rivals, Fintech companies, have been actively promoted by the government as a key player of the future.
   2. Regulatory and Sanctions Compliance. Again this is not a challenge unique to the Cypriot banking sector, but it is a significant cost burden and the complexities involved again underline the need for the banking sector to invest in the technology which will assist it in ensuring that it meets its international obligations.  Most recently the country’s historic and modern-day ties with Russia coupled with its geographic position and EU membership have placed it firmly in the headlights of US and UK sanctions agencies.  Whilst not legally obliged to impose UK and US sanctions, the reality is that in order to continue to function as a respected financial centre Cyprus has no viable alternative other than to fall in line with both countries as well as the EU.  Outside of this, the island’s position as a conduit for investment between the EU, Eastern Europe, Africa and the Middle East means that the sector is involved in a high number of complex cross border transactions relative to its size and consequently the scrutiny level required is also raised.
   3. Excess liquidity. Currently Cyprus has the highest ratio of bank deposits to loans in Europe.  Whilst it has been argued that this represents a return of confidence in the banks following the 2013 ‘haircut’ the reality is that the situation is reflective of a combination of factors.  Specifically, the sector has been accused of being overly risk averse when considering loan applications, overly bureaucratic and lacking in vision as regards alternate investment possibilities.  Whilst it is currently making profits on the differential between interest received on its large deposits held with the European Central Bank (‘ECB’) and the low levels paid to its depositors this is a temporary aberration and not a sustainable long-term position.  The banks need to find new income streams and provide a commercial service suited to the needs of the Cypriot economy.
   4. Non-performing loans. Much of the historic NPL problem has been resolved by the offloading of problem debt portfolios to asset management companies and a more robust approach to debt enforcement.  However, the overall level of non-performing debt within the economy remains high and measures put in place as a ‘temporary relief’ during the Covid pandemic such as bans on foreclosures involving residential properties remain in force.  There are concerns that the situation between Ukraine and Russia and the sanctions related to them may, if they persist for the long term, result in a new wave of economic hardship and consequential increases in commercial and domestic loan defaults.
   5. Cybersecurity risks. Increasing the use of technology within the sector means increasing the risk of security breaches.  Cyber breaches, when they occur, tend to be high profile and costly – both in terms of financial and reputational damage.  Investment in the latest security driven measures such as Address Verification Services, End to End Encryption and a variety of authentication procedures is essential and continuous.  So too is the need to ensure that staff are aware of the risks and appropriately trained to help counter them.

The Response

The past few years have witnessed a significant level of consolidation within the Cypriot banking sector coupled with large scale reductions in branch networks and staffing levels.  In a three-year period the number of branches has reduced by 30% whilst the number of ‘online’ customers has increased by 70%.[2] The associated one-off costs were high, but they have resulted in a far more cost-effective streamlined structure moving forward.  Moody’s estimate that the sectors cost to income ratio will move far closer to that of their European peers from 2024 onwards. The managed closure of Russian Commercial Bank (RCB) removed one of the most significant banks from the market leaving Hellenic Bank (which acquired the RCB performing loan portfolio) and the Bank of Cyprus as the two dominant market players.  Further consolidation may still occur since Eurobank is attempting to increase its stake in Hellenic to 30%.

Work on removing NPLs from the balance sheet continues to progress with the reduction to an overall level of 9.6% from 11% at the end of 2021 attributed to a combination of loan repayment, debt restructurings and debt write offs.  On 31 March 2023 Hellenic Bank announced the completion of its ‘Starlight Project’ which concerned the sale of a NPL portfolio and of APS Debt Service Provider Ltd to Themis Portfolio Management Ltd.  It also announced that it had entered into a long-term contract to manage its remaining NPL and any future ones that may arise.  Against these positive moves, however,  sanctions against Russia have resulted in record inflation of energy bills due to a heavy dependency on imported energy.  This is expected to challenge the ability of private and commercial borrowers to repay their debts as originally scheduled.

Profitability levels in the sector also remain low due to an almost exclusive reliance on interest rate differentials to generate profit.  A temporary uplift in ECB rates in 2023 has been beneficial but in order to constantly achieve the ECB viability target of 6-10% a new strategy is required.

In January 2023, in cooperation with the Association of Cyprus Banks,  Ernst & Young produced a report on the future of the banking sector in Cyprus. The report underlined the importance of the sector to the Cyprus economy and suggested that in order to gain the ‘buy in’ of all stakeholders, future strategy for the sector should focus on developing banking which conformed to four pillars.  The sector should be:

1. 1. ‘Purpose Led’ – A comprehensive ESG strategy should be developed and implemented which will help drive the economy forward and ensure that the country meets its EU climate obligations. This should be linked to a culture of integrity and professionalism with a goal of restoring trust in the sector which was lost as a result of the 2013 ‘haircut’.
   2. ‘Viable’ – Steps should be taken to develop a sector which demonstrates sustainable profitability and provides a ROCE in line with, at a minimum, the EU average. There needs to be a move towards developing new income streams (including possible alliances with fintech rivals and, developing sector specific products), accelerating the digitalisation of operations and further reducing the cost base and most notably staffing costs.
   3. ‘Safe and Stable’ – There must be no repeat of the events of 2013.  The banks must maintain capital adequacy, keep NPL at an acceptable level, employ stringent corporate governance policies, exhibit ESG compliance including with EU Taxonomy, the newly agreed Corporate Sustainability Reporting Directive, the Sustainable Financial Disclosure Regulation and the upcoming Pillar 3 ESG disclosures and they must prioritise cyber security.
   4. ‘Progressive’ – The banks must harness technology to ensure that they can continue to compete with their Fintech rivals.  This will also mean ensuring that staff are adequately trained, and the right skill sets recruited. However, the banks must also be viewed as accessible by all their customers – this may mean having some form of physical presence in remote areas to assist those who are not at ease with modern technologies and also ensuring that the digital platforms utilised are easy to understand and operate.

The public response by major players, Bank of Cyprus and Hellenic Bank, to the report has been swift and supportive.  Early in April, Bank of Cyprus affirmed that assisting the country to transition to a more sustainable basis is one of its strategic priorities and consequently it was establishing a ‘Sustainable Finance Framework’.  The Framework is supported by a second party opinion given by Moody’s and will allow Bank of Cyprus to issue Green, Social and Sustainable Bonds.  The proceeds from issuing the bonds will be used to finance sustainable projects including those linked to renewable energy, energy efficiency, clean transportation, green buildings, access to essential services including healthcare and, employment generation and SME financing.  This was followed in May by Hellenic Bank announcing that having set customer as well as staff satisfaction as its top priority, it was investing in upgrading its banking services, focusing on a new service model to transition to the digital age fully and effectively. Hellenic’s aim is to progress on three simultaneous tracks – digital customer service, internal processes, and optimising workplace culture[3].

The challenge now for the sector is take advantage of its return to profitability as a result of a ‘one off’ interest boost. The major banks must ensure that they follow through on their promises as regards modernisation, sustainable development, and diversification whilst continuing to adhere to strong and prudent corporate governance policies. Failure on any front may well see them fall by the wayside as the Fintech sector continues to rise.

Footnotes:

[1] Interview with Cyprus News Agency 19 January 2023

[2] The Future of Banking in Cyprus – Report prepared by Ernst & Young with the support of the Association of Cyprus Banks

[3] Cyrus Mail, 23 May 30, 2023

Corporate & Commercial

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.

Building a justice system fit for the future!

Background

Since gaining independence from the UK in 1960 Cyprus has transformed itself into a successful, modern international business centre. A Member State of the European Union (‘EU’) since 2004, it provides a gateway for investment into and from Europe and, due to its geographic location, it enjoys strong commercial ties with Eastern Europe, the Middle East, Asia and Africa.   A consequence of this is  that commercial disputes frequently involve international parties at corporate and individual level. Additionally, where main court or arbitration proceedings take place in another EU Member State or in a third country with which Cyprus has a bi-lateral agreement or has ratified an international agreement, it is common where a link exists, for the parties to look for provisional measures in Cyprus in support of the foreign court proceedings.  The commercial disputes arising are varied and may be linked to issues such as negligence, fraud, contractual disputes, corporate disputes etc. The dominant means of settling large commercial disputes in Cyprus is via litigation. Until September 2023 there was often negotiation before and during court proceedings but no legal obligation on or expectation that the parties will engage in such discussions unless they have specifically agreed to do so. However, since September 2023, with the implementation of the new Civil Procedure Rules, the parties in a dispute are obliged to engage in discussions with the aim to amicably settle such disputes before proceeding to the pursue of a Claim before the Courts of Justice.  Alternative dispute resolution methods (“ADR”) are a relatively new concept, other than in the construction and co-operative institutions sectors, but they do exist.

Cyprus is primarily a common law jurisdiction with a justice system which is based on the adversarial model. This is a legacy from its period as a British colony.  Much of Cypriot legislation is based on the UK laws in force at the time Cyprus ceased to be a colony.  It is updated and amended regularly to ensure alignment with all relevant EU Guidelines and Directives.  Where there is no applicable Cypriot legislation, English common law and equity are applicable, and English authorities have persuasive force.    The courts are bound by the doctrine of precedent according to which where the common law has been interpreted by the Supreme Court of Cyprus in a particular way, the subordinate courts will be bound by that interpretation.   This offers the parties to a commercial action  the advantages of consistency, predictability and efficiency.

Problems

Despite the apparent attractiveness of the Cypriot legal system to national and international business it has, since the 2008 financial crash, been heavily criticized as an obstacle to the commercial growth of the island.  It should be stressed that this criticism does not stem from a real or perceived lack of integrity or independence on the part of the judges.  Rather, it is directed at the enormous backlog of cases pending before the courts and the average time it takes to get a final judicial decision in any given case.  Whilst the courts are generally efficient in determining applications for interim relief, final adjudication in a case can commonly take between three and six years to obtain. A functional review of the justice system in 2017/18 supported by the EU Structural Reform Support Service (SRSS)[1] found that the length  of court  proceedings was among the longest in the EU, and the level of backlogs in litigious civil and commercial  cases among  the  highest.  Such delays run contrary to the democratic nature of the EU which, along with the Cypriot government, citizens, and businesses adopts the view that ‘justice delayed’ is ‘justice denied’.  Working with the EU and its representative bodies Cyprus determined that problems in the justice system were primarily caused by:

• A large increase in cases and appeals being brought before the courts as a consequence of events linked to the financial crash.
• A lack of support resource within the system. The use of legal officers to support judges in the research and drafting of judgements was very limited.
• An increase in the complexities of the cases brought before the courts.
• An unrestricted right of appeal.
• Reliance on a paper based system with very minimal use of ICT for internal or external communication resulting in significant inefficiencies and, inter alia, a management information deficit.

Next steps

The reaction of the Cyprus government to the findings of the SSRS was twofold.  Firstly It determined that there was an urgent need to begin addressing the backlog of existing cases.  Secondly, it realised that the entire justice system was in need of radical reform.

Case Backlog

To help facilitate a reduction in the backlog the first step taken was a decision to increase the overall capacity of the justice system by increasing the number of judges.  The House of Representatives passed a 2019 budget which included the creation of 32 new judges.  Following on from this a pilot project was introduced in the Paphos District Court.  The project involved the assignment of seven experienced judges to a ‘task force’ dedicated to reducing the case backlog.  The theory was that the experience level of the judges would allow them to assess the cases with relative speed.  The pilot was deemed to be beneficial and was expanded in September 2021 to cover all districts.

In addition, an amendment was made to Civil Procedure Rules which established a ‘small track’ procedure.  This allowed for the introduction of a simplified process for claims under €3,000.  This increased the case management options available to judges by allowing them to give summary judgments on the lower value cases and thereby accelerating the speed with which they could be dealt with.

Reform of Justice System

It was clear from a series of EU backed reviews that a wholesale redesign of the system was required. This required detailed planning and necessitated the involvement and ‘buy in’ of all stakeholders in the system.  Consequently, and with the support of the European Commission for Democracy through Law, a period of comprehensive consultation and review took place with the cooperation of all stakeholders. The result of this exercise was the production, in 2021 of a coherent plan (the Plan) to reform the Cypriot justice system with the object of building a modern, accessible and efficient system.

The key pillars of the plan are:

• New Civil Procedures Rules
• Training for judges
• Reform of the court structure
• Introduction of technology

In its entirety the plan represents a seismic change for the Cypriot justice system.  The plan is now in the process of implementation and many parts of it feature in the post covid ‘Recovery and Resilience Programme of Cyprus’ (the ‘RRP’).

New Civil Procedures Rules

The Civil Procedures Rules (the ‘CPR’) which were in use until the end of August 2023, were substantially in the form of the Civil Procedures Rules that operated in England and Wales in 1958. The revision of the CPR was one of the most significant reforms included in the Plan. The project was undertaken by a team of international experts who worked in collaboration with a Rules Committee established by the Supreme Court. A revised set of rules drafted by them was then subject to consultation with the Cyprus Bar Association and the Judge’s Association.  Following this, on 19 May 2021 the new CPR were approved by the Supreme Court and came into force on 1^st of September 2023.

This reform is expected to have a material impact on the efficiency of the courts, as it is structured in such a way that many disputes could be resolved at a pre-trial stage and unsubstantiated legal procedures are discouraged. In addition, firm compliance with the new CPR is expected to achieve the granting of justice is a much faster pace and without the delay currently experienced, with significant reduction of legal costs.

Training for Judges

Obviously, the introduction of the new CPR and the adoption of new technologies will only be successful if judges are adequately trained in their use.  Consequently, following the enactment of the relevant law 14 August 2020 a training school for judges was established.  This formalises training for the new justice system and will also support ongoing training of judges.  It is envisaged that, in line with many other professions, judges are now required to engage in continual education for their period of tenure.  This move to a higher level of professionalism follows on from a decision taken by the Supreme Court in 2019 to publish the criteria for the recruitment of judges and for the promotion of judges.  Said criteria were set following a study undertaken by the DG Reform of the European commission.

Within the framework of the RRP a commitment was made to ensure that at least 110 judges had completed annual training on the new CPR and various other agreed topics and skill by quarter 4 of 2025.  According to the Ministry of Justice and Public Order this target had already been surpassed by 31 January 2023.

Reform of Court Structure

Prior to the proposed reforms, the Supreme Court sat at the apex of the court system in Cyprus. The Supreme Court consisted of 13 members, and it exercised both original and appellate civil and criminal jurisdictions. It was vested with authority as:

• Supreme Constitutional Court.
• Supreme Administrative Court.
• Admiralty Court.
• Appellate Court.
• A court with exclusive jurisdiction to hear and determine petitions concerning the interpretation and application of the electoral laws.
• A court with exclusive jurisdiction to issue prerogative writs (e.g. habeas corpus, mandamus, prohibition, quo warranto, and certiorari).

No special leave to file an appeal was required. The Supreme Court, in its appellate jurisdiction, was not bound by any determination on a question of fact made by the trial court, and it had power to review all the evidence, draw its own inferences, hear or receive further evidence and give any judgment or make any order which the circumstances of the case may have justified, including an order for retrial.

The wide jurisdiction of the Supreme Court and the increasingly specialized knowledge required to deal with many of the cases before it created perfect conditions to foster a bottleneck in the justice system.  Changes were required to disperse the workload and ensure that the more complex cases were dealt with by judges with the appropriate skills and expertise.

On 7 July 2022, the House of Representatives voted (the 22^nd amendment) for:

• The separation of the Supreme Court into two Supreme Courts: one Supreme Constitutional Court with 9 judges and one Supreme Court with up to 7 judges.
• The creation of a new Second Instance Court, i.e. the Court of Appeal (Appellate Court). The Appellate Court will hear appeals from the First Instance Courts (administrative, civil and criminal) and will be comprised of up to 16 judges. The new Supreme Court will act as a third level appellate court hearing cases referred to it by the Appellate Court.

Additionally, on 12 May 2022, the ‘Establishment and Operation of Commercial Court and Admiralty Court Act 2022’ (‘the Act’) was passed. The Act establishes a dedicated Commercial Court which will have jurisdiction to hear and determine at first instance all commercial disputes where the amount or value in dispute is at least €2,000,000. Excluded will be claims or counterclaims in personal injury cases and claims, counterclaims, or registration of an arbitral award in relation to banking or financial matters. The Act also establishes an Admiralty Court which, once operational, will have jurisdiction to hear Admiralty cases as defined in the Act.  Given the rising importance of Cyprus as an international business and shipping hub, the introduction of these dedicated courts should significantly decrease the pressure on the Supreme Court.  Also significant is that, prior to the passing of the Act, the House of Representatives approved an amendment of Article 3 of the Constitution of the Republic of Cyprus to allow the use of English in both courts when to do so would be in the interests of justice. Greek will remain the official court language but a Judge of either court may, at the request of one of the parties, allow the use of English, including for the submission of documents and evidence. Since English is more widely spoken than Greek this should again increase efficiency by removing the need to always involve translators and certified translations of documentary evidence.

Originally it was intended that the new court structure should become operational on 1 January 2023. This deadline was later extended to 1 July 2023 to allow more time for the recruitment and training of additional judges and court staff.  Whilst targets set out in the RRP have been exceeded the Supreme Court, the Justice Minister and the Attorney General agreed that fully staffing the new courts on the original deadline would have resulted in understaffing of the lower courts.

Introduction of Technology

Widespread introduction of technology into the justice system is essential if the system is to become and remain efficient and effective.  The failure to engage with technology led to a catastrophic situation during the Covid 19 lockdowns where the courts were forced to close because they lacked both equipment and expertise to function remotely.

The Plan therefore incorporated the introduction of an i-justice platform as an interim step towards full engagement in the EU wide e-justice project.  The platform was launched on 21 July 2021 as a pilot version with the objective of streamlining legal processes.  The pilot was judged to be a success and use of the platform for commercial cases became obligatory from 1 February 2022. The full implementation of the system was preceded by thorough training and a sufficient period to allow users to build familiarity with the system.  Additionally, the Cyprus Bar Association (CBA), organized training points in the local bar associations, so that any difficulties of a technical nature could be resolved immediately and effectively.   The I-Justice platform aimed to bring together litigants, advocates, law firms, court staff and clerks, judges, the police and relevant governmental authorities so that justice is administered in an effective and practical digital environment.   The platform allows lawyers to:

1. 1. Submit claims remotely.
   2. Access electronic case files
   3. Pay fees and commissions remotely.
   4. Access up to date information about the progress of ongoing cases.
   5. Attend tcourt appearances remotely, through the communication portal.

Supplemental to the above, on 15 September 2021 the Supreme Court issued a court regulation, the so-called ‘e-Justice Procedural Regulation’. This regulates the handling of cases through electronic communication (emails) with the Court and allows but does not compel judges to handle cases without any physical presence.

Use of the i-justice platform greatly simplified and sped up the operation of the court system in general with specific advantages accruing to those seeking to settle commercial disputes. It has eased the transition to the ‘e-justice’ platform which is expected to be implemented before the end of 2023.  Further modernization will involve the introduction of Digital Audio Recording of minutes to the courtroom.  This is currently being piloted and should be fully implemented by the first quarter of 2025 and again lead to time savings and greater efficiency.

Mission accomplished?

There can be no doubt that important progress has been made in the march to deliver a new justice system that will be fit for future generations.  The President of the Supreme Court and the President of the House of Representatives have both publicly stated that they expect the backlog of cases to be cleared within a 5-year period[2].  Within the RRP framework a commitment has been given by the Supreme Court to meet specific targets in the reduction of cases and appeals which have been pending for more than two years. An ex-President of the Supreme Court has been appointed to co-ordinate and monitor progress.  Some protests by members of the Cyprus were recorded at the introduction of the possibility of summary judgements of small claims but these have not been sustained. The passage of the legislation introducing a new court structure was a significant milestone.  Whilst some disappointment has been expressed at the delay in the implementation of the new courts, criticism has been muted.  The general perception appears to be that it is better to ensure that all necessary resources are in place from the outset than to risk creating new problems to resolve.  It is, however, important for the economic future of Cyprus that the delay does not become a lengthy one. The introduction of formal training requirements for judges can only prove to be beneficial for all stakeholders in the system.  The same is true for the use of technology which finally allows the courts to move out of the 20^th century.

January 2023 saw the delivery of a report following completion of a project related to the establishment of a modern, efficient Court Service to support the management and administration of the courts.  It produced recommendations on re-engineering of procedures, organisational and governance structures and staffing requirements. These recommendations are now under consideration by the Supreme Court and the relevant Ministries and effectively form the final part of the ‘jigsaw’.

Overall, provided momentum can be maintained, the signs are favourable for the creation of a justice system which is fit for Cyprus in the 21st century and which will be capable of adapting to future requirements.  Given that the EU has stressed that lack of reform is deterring investment in the country it seems unlikely that the desire for change will dissipate any time soon.

Footnotes

[1] http://www.supremecourt.gov.cy/Judicial/SC.nsf/All/EBD26B775C1A627DC225843F0041884A/$file/Functional%20Review%20of%20Courts%20System%20of%20Cyprus%20(IPA%20Ireland)%20-%20Final%20Report%20March%202018.pdf

[2] https://knews.kathimerini.com.cy/en/news/the-backlog-in-court-cases-will-be-alleviated-in-4-to-5-years https://knews.kathimerini.com.cy/en/news/the-backlog-in-court-cases-will-be-alleviated-in-4-to-5-years

Cyprus

Nestled in the eastern Mediterranean, Cyprus has long been a sought-after destination for investors seeking a strategic business foothold in Europe and beyond. With its rich history, favorable business infrastructure, strong economy, and appealing opportunities, Cyprus remains an attractive jurisdiction for both domestic and foreign entrepreneurs, organizations, and corporations.

Business environment

Changes in 2023 versus 2022 – What has changed in the last year that has impacted the way business is conducted?

2023 presented both challenges and opportunities for investors, with several notable developments impacting the business environment and overall economic outlook.

Top sectors driving positive growth trends

The ICT sector continues to be a pivotal driver of Cyprus GDP growth with contributions by this sector amounting to €655 million in 2023. This was achieved by the ongoing collaborative efforts of both the government and private sector, that also included several incentive packages to attract multinational technology companies to the country. These packages seek to ensure the quick processing of company registrations and the swift issuance of work permits to personnel (made possible by the Business Facilitation Unit, launched by the Ministry of Energy). The objective is for corporations to be able to operate in an efficient environment without complexities.

Additionally, economic expansion was also fueled by the sector encompassing wholesale and retail trade, vehicle and motorcycle repair, transportation, storage, accommodation, and food services. Within this category, covering commerce, hotels, and restaurants, there was a significant annual growth of 5%, injecting €1,366 million into the economy. The second major contributor to the country’s GDP was public administration, defense, mandatory social security, education, human health activities, and social care, showing a 1.4% annual increase and contributing €1,088.4 million. Finally, the real estate sector also contributed a reported €510 million to the GDP, with a 0.8% annual increase.

Impact of UK/US sanctions

2023 was marked with instability in the context of the sanctions imposed by the EU, United Kingdom and the USA on Russian interests as a result of the Russian aggression against Ukraine. As with the rest of Europe the sanctions had a negative effect on the Cyprus economy, and the services and tourism sectors in particular. This has prompted discussions among policymakers and industry leaders to explore measures for economic recovery and long-term stability.

Tax reforms

Cyprus introduced a series of tax reforms in 2022 that continued to enhance its attractiveness to international investors in 2023. These measures aimed to maintain Cyprus’s status as a preferred tax jurisdiction and to promote innovation. They included the introduction of Cyprus’ Recovery and Resilience Plan, Transfer Pricing rules in line with the OECD, new green taxes, a 120% R&D deduction for companies, updates to the 20% and 50% personal income tax exemptions and Double Taxation Agreements.

Economic outlook

The flash estimate from CyStat revealed a promising economic outlook for the fourth quarter of 2023, with a growth rate of 2.3% compared to the same period in 2022 and a notable 0.8% increase from the preceding quarter. The overall growth rate for the year 2023 stands at 2.5%, closely aligning with the Ministry of Finance’s conservative forecast of 2.4%. Eurostat’s comparative data highlights Cyprus as the second highest in growth among Member States for Q4 2023, surpassing the Eurozone and EU averages of 0.0% to 0.3%. In quarterly terms, Cyprus achieved the second-largest increase alongside Portugal after Slovenia, contrasting with the EU’s 0.1% growth rate and the Eurozone’s 0.0%. (Ministry of Finance)

What are the advantages of your country as a business location?

Cyprus boasts a strategic geographical position, situated at the crossroads of Europe, Asia, and Africa, making it a prime location for businesses seeking entry into these lucrative markets. This unique positioning presents a wealth of opportunities for international enterprises. Additionally, Cyprus offers an appealing tax system with one of Europe’s lowest corporate tax rates at 12.5% and an extensive network of double tax treaties. Further, the country has introduced a favorable Intellectual Property (IP) regime that provides tax incentives for companies holding IP rights, reducing their effective tax rate as low as 2.5% on IP-related profits. Such tax advantages make Cyprus an enticing choice for foreign investors seeking to optimize their financial profiles. Additionally, the country is included on the OECD’s whitelist of jurisdictions and has also received positive credit rankings in 2023 from Fitch (BBB), Moody’s (Baa2) and S&P (BBB). Cyprus also finds its long-term credit rating 3 grades above the minimum investment threshold, specifically at BBB High and BBB+ by DBRS Morningstar and the Germany-based agency Scope Ratings.

The island further stands out due to its well-developed infrastructure, including modern telecommunications, global ports, and international connectivity. A skilled and educated workforce, proficient in English, strengthens Cyprus’s appeal for companies seeking to establish their operations. The nation’s economy has displayed resilience, exhibiting consistent growth and recovery following the economic challenges spurred by the Covid-19 pandemic. Beyond this, Cyprus diversifies its business sectors, extending well beyond traditional domains like tourism and real estate. Thriving in sectors such as ICT, fintech, shipping, renewable energy, entrepreneurship & innovation, investment funds, filming, and higher education, Cyprus’s economic prospects remain robust. Moreover, its straightforward legal system simplifies business establishment and operation. Furthermore, Cyprus offers accessible residency programs for foreign investors, allowing them to secure residency through varied investment opportunities. Lastly, Cyprus’s European Union (EU) membership opens doors to the EU’s market and free trade with other member states, enhancing its business attractiveness on a global scale.

What are the business structures in your country?

Private limited liability company by shares

Such a company has share capital, and the liability of its members is limited by its memorandum of association to any unpaid amount, for the shares they hold. A private limited liability company by shares must have at least one (1) shareholder but no more than fifty (50), exclusive of any persons who are or have formerly been in the employment of the company and are or still continue to be members of the company. A private limited liability company cannot offer its shares for subscription to the public. This is the most common type of company.

Public limited liability company by shares

This company has share capital and the liability of its members is limited by its memorandum of association, to any unpaid amount, for the shares they hold respectively. A public limited liability company may invite the public to subscribe for its shares and may be listed on the stock exchange. The number of members of a public company must be at least seven (7). The minimum authorized and issued capital of a public company, which is offered for subscription, must be twenty-five thousand, six hundred and twenty-nine euros (€25,629).

Limited liability company by guarantee without share capital

This type of company does not have share capital and its members act as guarantors rather than shareholders. The liability of its members is limited by its memorandum of association, up to the amount that the members have undertaken to contribute respectively to the assets of the company in case of dissolution.

Limited liability company by guarantee with a share capital

This company has share capital and the liability of its members is limited by its memorandum of association, on the one hand, up to any unpaid amount for the shares they hold, and on the other, up to the amount that its members have respectively undertaken to contribute to the assets of the company in case of dissolution. This type of company can be either private or public company. If it is a public company, it can invite the public to subscribe for its shares.

Variable capital investment company

This company is a limited liability company by shares. The main characteristic of this type is that, according to its memorandum of association and the rules governing its operation, its shares do not have a nominal value but rather a variable value. The company can be incorporated after it receives a relevant license from the Cyprus Securities and Exchange Commission (CySec) to operate as Collective Investment Funds (CIF).

A variable capital investment company (VCIC) can take the form of either a private or a public company, depending on the type of collective investment fund (CIF) that such variable investment company will take (UCITS, AIF, AIFLNP, RAIF). The number of members of a private company can range from one (1) to fifty (50) members while the number of members of a public company must be at least one (1).

General Partnership

In a general partnership, all partners are general partners and therefore every partner is jointly and severally liable with all the other partners for the debts and obligations of the partnership that arise while he/she is a partner. A general partnership must have at least two (2) partners.

Limited Partnership

A limited partnership must comprise of one (1) or more persons who will be the general partners and shall be responsible for all the debts and obligations of the partnership, as well as one (1) or more persons who shall be the limited partners who will contribute a certain amount or property, valued at a specific amount to the partnership and to which persons a specified number of shares may be assigned. Limited partners are not liable for the debts and obligations of the partnership beyond the amount they have contributed. A limited partnership may have a share capital and be limited by shares. Regardless of whether it has share capital or not, a limited partnership is not considered as a legal entity with an independent legal personality.

Economy

Currency strength

Cyprus adopted the Euro as its official currency on 1 January 2008. The Euro is one of the top 10 strongest currencies in the world and is the official currency of 20 out of the 27 countries that form the European Union. Euro coins and banknotes entered circulation in 2002, and the currency is free-floating.

Inflation rates

Inflation (HICP) in September 2023 is estimated to have increased by 4.3% compared with an increase of 3.1% in August 2023. For the period January-September 2023 the HICP is estimated to have increased by 4.4% compared to the corresponding period of the previous year.

Main trade sectors

Tourism plays a pivotal role in Cyprus’ economy, and officials anticipate 2023 to be a record-breaking year for the country. Although the COVID-19 pandemic had a significant impact on the industry, it is rapidly recovering as conditions improve. Cyprus is also a hub for foreign investment, particularly in real estate, which offers an abundance of residential and holiday properties, as well as numerous commercial real estate developments in key cities like Limassol. According to a PwC analysis, the real estate market on the island demonstrated resilience during 2023, with total value of transactions reaching €5.5 billion.

In addition to tourism and real estate, Cyprus boasts a well-developed financial services sector that includes banks, financial service providers, insurance companies, and investment firms. The country’s favorable tax system has attracted many international companies, fostering stability and promoting foreign investments and business startups. Additionally, Cyprus serves as a major global shipping hub, hosting numerous shipping companies and ship management firms. Notably, ship management revenues reached €623 million for the first half of 2023. Constituting 7% of the country’s GDP, the shipping industry is poised for further growth, with several global shipping giants relocating their activities to the jurisdiction.

Cyprus is also making strides in the energy sector, focusing on developing its natural gas resources and renewable energy through solar power initiatives.

Driving the Cyprus economy forward in 2024 are its expansive technology, entrepreneurial, and innovation sectors. Notably, the fintech sector has seen rapid growth, attracting international businesses and investors. As already stated, the information and communications (ICT) services sector has expanded significantly, becoming an impactful driver of Cyprus’ GDP growth, injecting billions into the economy. Cyprus has nurtured a thriving start-up ecosystem, with almost 450 start-ups and scale-ups with a combined valued of €3.7 billion in 2023. The government of Cyprus actively promotes innovation and entrepreneurship by offering tax incentives and support for start-ups and technology companies. The funds industry in Cyprus has also tripled in size since 2016, attracting substantial global interest and investments.

Legal system

How does the legal system operate? What should clients be mindful of when doing business in your jurisdiction?

Cyprus is primarily a common law jurisdiction with a justice system which is based on the adversarial model. This is a legacy from its period as a British colony.  Much of Cypriot legislation is based on the UK laws in force at the time Cyprus ceased to be a colony.  It is updated and amended regularly to ensure alignment with all relevant EU Guidelines and Directives.  Where there is no applicable Cypriot legislation, English common law and equity are applicable, and English authorities have persuasive force.  The courts are bound by the doctrine of precedent according to which where the common law has been interpreted by the Supreme Court of Cyprus in a particular way, the subordinate courts will be bound by that interpretation. This offers the parties to a commercial action the advantages of consistency, predictability, and efficiency.

Foreign investment restrictions

Regulatory environment

Cyprus, as an EU member state, operates within a regulatory framework that encompasses various sectors, each designed to promote economic growth, protect the rights of consumers and investors, and ensure compliance with international standards. In the financial realm, the Cyprus Securities and Exchange Commission (CySEC) oversees banking, insurance, and investment services, aligning the country with EU directives to maintain financial stability. The nation’s competitive tax environment, with a low corporate tax rate and extensive double taxation treaties, positions Cyprus as an attractive hub for international businesses, and the government actively combats tax evasion and money laundering. Moreover, Cyprus upholds robust labor regulations and fosters fair working conditions, while consumer protection measures are in place to safeguard consumers’ rights. The regulatory landscape here extends to environmental protections, legal systems, and data privacy, with an overarching commitment to EU standards.

Cyprus also ensures a conducive environment for business operations and investment. The Department of Registrar of Companies and Official Receiver facilitates the registration of various business entities, welcoming foreign investment. In the real estate and construction sectors, regulations maintain construction quality and safeguard buyer rights, while in the telecommunications and IT domains, regulatory bodies ensure competition, service quality, and data protection. These efforts are complemented by a robust legal system based on English common law principles, providing the legal foundation for contracts, property rights, and dispute resolution.

In response to global concerns, Cyprus has implemented comprehensive measures in areas such as anti-money laundering and counter-terrorism financing, aligning its regulations with international standards and EU directives. Additionally, the country complies with the General Data Protection Regulation (GDPR), ensuring the privacy and security of personal data. In healthcare and pharmaceuticals, Cyprus adheres to EU standards in the delivery of healthcare services and the regulation of pharmaceutical products. Overall, Cyprus’ regulatory environment reflects its commitment to maintaining a thriving economy, protecting individual rights, and adhering to international norms in various sectors of governance.

Direct investment

The Cyprus government has an established record of seeking to encourage foreign direct investment into the country in order to diversify its economy. The tax system has played an important role in these efforts and consequently the  Cyprus tax regime has evolved into being one of the most attractive in Europe for individuals, investors and businesses. According to CEIC, Cyprus Foreign Direct Investment (FDI) increased by 1.1 USD bn in Jun 2023, compared with a drop of 1.6 USD bn in the previous quarter. CEIC converts quarterly Foreign Direct Investment into USD. The Central Bank of Cyprus provides Foreign Direct Investment in EUR. Federal Reserve Board average market exchange rate is used for currency conversions.

Restrictions on foreign capital

There are currently no restrictions on ownership and investment in Cyprus.

Foreign exchange controls

Cyprus imposes no capital restrictions but as with other EU countries, travelers to the island must declare cash sums exceeding EUR10,000 upon arrival.

Interviews

Elias Neocleous

Managing Partner, Elias Neocleous, reflects on the changing face of the legal profession in Cyprus.

 

1) What do you see as the main points that differentiate Elias Neocleous & Co LLC from your competitors?

We continue to stand apart from our competitors in three distinct ways, exceptional service delivery, our drive for innovation, and our commitment to help drive the Cypriot economy forward.

Firstly, our firm is driven by a common-sense approach to solving complex legal challenges in what is an evolving business landscape. Our clients rely on us for our integrity and multidisciplinary, pragmatic approach to helping them comply with evolving regulatory and legislative frameworks and to secure successful, cost-effective commercial and legal outcomes. We focus on maintaining professional excellence in an environment where our talent can also develop and thrive. We do this by combining our resourceful knowledge base with groundbreaking AI and machine learning technologies to deliver added value to our clients and to distinguish us from our peers. We seek to fully understand every client to ensure our legal feedback and service delivery is performed to the highest level. Additionally, our firm continues to enhance internal processes through globally recognized ISO accreditations and ESG objectives. In 2023, we achieved re-certification with ISO 9001:2015 and received certification with ISO 45001:2018, highlighting our commitment to excellence in quality management and occupational health and safety standards. Further, a comprehensive audit of the firm’s Human Resource functions and of its Health and Safety procedures saw our firm accredited by the Cyprus Employers and Industrialists Federation (OEB), with ‘Sound Industrial Relations 204 (SIR 2014)’. The certification confirms the firm’s commitment to safeguarding the professional and personal well-being of its employees.

Secondly, our firm is committed to taking strategic risks as we explore new markets and expand our range of services for clients. For instance, Neolaw.ai, our award-winning ALSP, integrates cutting-edge technologies like machine learning, AI, and natural language processing, to serve as a valuable legal assistant and knowledge hub for both in-house and practicing lawyers in Cyprus and abroad. Additionally, our ‘Technology Law’ department excels in aiding high-tech startups, early-stage businesses, and companies looking to relocate to Cyprus. Our Legal Tech Hub also empowers our firm to explore new possibilities and push boundaries in legal service delivery. We leverage people, technology, services, and global partnerships to create efficient ways of working. This ensures the longevity of our firm and benefits our clients in a digitalized future.

Finally, we aim to facilitate the ongoing development and growth of our talent through cutting-edge development programs, interactive learning, and meaningful work, and are committed to community engagement through multiple CSR activities. This includes the delivery of service that increases economic, social, and environmental outcomes for our clients and the communities in which they operate, and initiatives to raise the standing of the professional sector in Cyprus. Locally, our CSR initiatives encompass a broad spectrum of activities, from environmental sustainability and community engagement to ethical business practices and employee empowerment. We take pride in supporting local health initiatives and educational and cultural programs. We are also committed to promoting justice and equality within the wider community, working on pro bono projects to ensure access to legal guidance and representation for all.

 

2) Which practices do you see growing in the next 12 months? What are the drivers behind that?

While I anticipate growth across most practice areas in our firm, I consider technology and cybersecurity, artificial intelligence, ESG (Environmental, Social, Governance), fintech, and possibly Restructuring and Insolvency law to play a pivotal role in this trajectory.

The pandemic, along with the Cyprus government’s goal to position the country as a hi-tech hub, significantly boosted the use of technology and emphasized the importance of cybersecurity. This convergence has propelled the sector to become one of the country’s fastest-growing industries, boasting an impressive average growth rate of 15% over last 10 years, surpassing all other sectors of the economy. This creates increased opportunities for our Tech Law team due to rising demand for legal expertise in technology related fields (AI, machine learning, cybersecurity, intellectual property rights, data privacy, etc). The growing popularity of cryptocurrencies, crypto assets, digital banking, digital transactions, and blockchain technologies is also generating an increased demand for legal expertise, especially in the context of AML directives and regulatory compliance.

ESG’s prominence is on the rise too, driven by both increasing regulatory demands and a global shift towards sustainability within the corporate realm. With a broadening awareness in this domain and our commitment to ESG principles, coupled with our legal knowhow, we anticipate a growing client base. Finally, the events in Ukraine coupled with UK and US sanctions, the ongoing Israel-Palestinian conflict as well as an environment of high inflation and high interest rates, has created a turbulent market that is impacting businesses significantly. We expect to see an increase in restructuring and insolvency activities as a result.

 

3) What’s the main change you’ve made in the firm that will benefit clients?

We are actively exploring ways to empower our lawyers in embracing legal tech and technology tools, including AI, to enhance the quality, conciseness, and depth of our legal service delivery. Through the widespread adoption of tech-driven solutions, we are accumulating greater business and legal expertise, which is made available to and shared with clients, helping them to address specific challenges in today’s business landscape. This approach is reshaping the mindset of our firm’s professionals, helping them grasp the rapid pace of change happening globally, and reaffirming our role as a useful, relevant, and vital legal resource for our clients. Moreover, we’re also adapting our business model internally to ensure longevity and sustainability in the face of a changing world.

 

4) Is technology changing the way you interact with your clients, and the services you can provide them?

Absolutely, technology will forever transform the way we engage with our clients and deliver services. We view these changes as opportunities to enhance our client offerings rather than challenges to be feared. Embracing emerging technologies enables us to operate seamlessly across the globe. Clients can conveniently connect with us online, saving time and expenses for routine matters. Moreover, technology grants us swift access to a wealth of information, including global legislation, case law, emerging trends, and geopolitical developments. It has also expanded our service portfolio to include areas such as cyber and data security. Looking forward, the evolution of artificial intelligence presents exciting possibilities, particularly for our Intellectual Property Team, opening up new avenues for innovation and growth.

 

5) Can you give us a practical example of how you have helped a client to add value to their business?

Drawing on our cumulative legal and business expertise across global industries, sectors, and geographies, we ensure a more pragmatic approach to service delivery. This involves integrating both legal advice and strategic business insights to facilitate growth and achieve successful legal outcomes for our clients. With the ability to tap into multidisciplinary specialists across our firm’s practice areas, we also provide unique technical know-how to address all aspects of law in a world flooded by regulation, ensuring compliance for our clients.

 

6) Are clients looking for stability and strategic direction from their law firms – where do you see the firm in three years’ time?

Most definitely. But simultaneously, they are also looking for firms with an innate drive to deliver legal solutions that anticipate the challenges of a digitised world. We strive to build teams with access to the tools and resources required to deliver an exceptional client experience. We aim to develop future leaders who will best serve the legal profession, and in turn, provide a differentiated, strategic service to clients based on expertise and trust. Our clients recognise our extensive experience across diverse markets, deals, legal systems, negotiations, and political landscapes. They rely on us to leverage this expertise effectively in assisting them with their varied goals, whether it’s expansion, downscaling, or acquisition. This level of support is not only crucial today but will also remain indispensable in a world that will definitely be shaped by the advent of AI for years to come.

 

Press Releases

Elias Neocleous & Co LLC and W11 Ventures announce strategic partnership

Elias Neocleous & Co LLC drives growth with key leadership and Associate promotions

Elias Neocleous & Co LLC retains elite position among Global Restructuring Review’s Top 100!

Elias Neocleous & Co LLC Honoured with Business Innovation Award for Advancing Industry Standards

EUR 1.3 billion high yield

Elias Neocleous & Co LLC accredited with ISO 45001:2018 certification in Occupational Health and Safety

Elias Neocleous & Co LLC provides legal support to Royal Caribbean Group (NYSE: RCL) in Cyprus

Elias Neocleous & Co LLC, together with Gofstein and Partners, has recently advised Zantemark Limited, operating under its brand name Yoloco, on setting up its operations and headquarters in Cyprus

Elias Neocleous & Co LLC advises on US$450 Million High Yield Bond Offering by Energean PLC

Elias Neocleous & Co. LLC faces Covid down with strong Financial Performance in 2020

ENC assists Mintra in acquisition of Safebridge

ELIAS NEOCLEOUS & CO LLC ADVISES GREENMONT AIFLNP LTD ON ITS INVESTMENT IN NACE ENERGIA IN SPAIN

Tender for Liquefied Natural Gas terminal at Vasilikos Bay

Elias Neocleous & Co LLC advises CPI Property Group on Globalwealth share acquisition

Legal Developments

Elias Neocleous & Co LLC advised the Zarenkov family in disposal of a 25% stake in Etalon Group PLC

Elias Neocleous & Co’s Financial Services team assisted the Zarenkov family on Cyprus corporate and financial services law matters in their February 2019 disposal of a 25% shareholding interest in Etalon Group Plc to Sistema PJFC, a publicly-traded diversified holding company. Etalon Group Plc, one of Russia’s largest and longest established development and construction companies,  is a Cyprus public company having Global Depositary Receipts (GDRs) traded on the Main Market of the London Stock Exchange since 2011. The relevant public announcements on this transaction are available in the website of the London Stock Exchange and of Etalon Group Plc.

New Cyprus law on data system security

New Cyprus law on data system security

The Security of Networks and Information Systems Law, Number 17(I) of 2018, implements articles 8 and 9 of EU Directive 2016/1148 on measures to achieve a high common level of security of network and information systems throughout the EU. It designates the Commissioner for Electronic Communications and Postal Regulation (Commissioner), appointed under article 5 of the Regulation of Electronic Communications and Postal Services Law 112(I) of 2004, as the national competent authority for the purposes of article 8 of the directive, with responsibility for coordinating the implementation of the cyber-security strategy and monitoring the application of the directive at national level.

New “federal” EU Tax rules on the table

In 2011, in response to public concerns over large multinational companies exploiting differences in national tax rules, the European Commission published a proposal for a Common Consolidated Corporate Tax Base (CCCTB) to unify tax rules throughout the EU. Individual countries would still be free to set their own tax rates, but anomalies between countries in terms of deductibility of expenses and recognition of income would be eliminated. The initial proposal met with considerable political resistance, particularly from the United Kingdom, and was not pursued. In October 2016, perhaps in anticipation of less resistance once Brexit was completed, the Commission issued a revised proposal to replace the earlier one. It aims to introduce a set of common rules for determining the tax base of companies with operations in several EU Member States and tax them in the country where their revenues are generated, and remove the anomaly of large companies paying what the public perceives as disproportionately low amounts of tax in countries where they have significant activities.

Comparative Guides

• Cyprus: Tax

  Published: October 2023

  Authors: Elena ChristodoulouFabian CabezaAlexis Christodoulou

  This country-specific Q&A provides an overview of Tax laws and regulations applicable in Cyprus.