The corporate and commercial landscape in Cyprus has witnessed some dramatic changes since the country gained independence from the United Kingdom in 1960. The economy at that time was dominated by agriculture and tourism and consequently, corporate and commercial activity on the island was both limited in scope and generally domestic in nature. Faced with developing the economy of a country with limited industrial and commercial activity and little by way of natural resource successive governments were required to be innovative and generate plans focusing on the attributes that Cyprus does have, namely:
- A geographic location which is at the intersection of three continents;
- A 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.
The first stage in this process was to try to diversify the economy by promoting Cyprus as a shipping and trading centre. Early corporate and commercial work therefore focused mainly on basic contract work and routine company secretarial style activity. Since then, however, some seismic changes have occurred.
Three stage development
There are three significant development stages that have resulted in Cyprus evolving into the international business and financial centre that it is today:
- 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, ‘new’ 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.
- 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 modernise 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.
- 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 rationalisation of the banking sector via insolvency, merger and acquisition and, a privatisation requirement for many key industry sectors including telecommunication and marine ports. Privatisation 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 and a comfort blanket of more than 60 double taxation treaties.
In the years following the ‘bail-out’ Cyprus worked hard to restore its reputation as a country with an advanced and stable economy. GDP growth outperformed EU averages and this resulted in Cyprus being better placed than most to weather the Covid-19 storm. Prior to the onset of the 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 is 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 remains 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.
Alongside traditional M&A activity, in recent years the corporate and commercial sector has benefitted from the Cyprus government strategy of positioning Cyprus as an ideal location for regional and international headquarters. During the past decade, several household names including NCR, Kardex, Amdocs, Bernhard Schulte Shipmanagement and Wargaming have all opted to headquarter on the island and utilise the experience of local professionals. The government is particularly keen to attract high technology firms and has introduced a particularly favourable IP Box scheme to facilitate this. The island has also become a hub for private wealth and advising high net worth individuals on investment, acquisitions and disposals accounts for a significant proportion of many firms’ activities.
Activity levels have also grown in both the hydrocarbon and the renewable energy sectors as Cyprus seeks to establish itself as a regional energy hub. The discovery of natural gas and potential oil deposits in Cyprus’ exclusive economic zone has attracted industry giants such as Total, Royal Dutch Shell and Exxon Mobil to explore the area. Multiple auxiliary service companies have been established on the island to support them. The European Union drive to increase the use of renewable energy also presents numerous opportunities for Cyprus based companies to exploit the island’s 365 day a year sunshine.
The Covid-19 pandemic has clearly impacted the M&A and general corporate and commercial marketplace in Cyprus as it has everywhere else in the world. Early in 2020, for example, AstroBank reached an acquisition agreement to purchase the banking business of Arab Jordan Investment Bank in Cyprus. The deal was terminated in August 2020 due to challenges arising out of the pandemic. Both banks continue to operate in the market, but it remains to be seen whether the acquisition is ‘on hold’ or off the table completely. The same is true of deals in other sectors.
Moving forward however, levels of activity are expected to pick up as the roll out of vaccines continues and some ‘normality’ is returned to the world economy. Specific areas of activity in Cyprus are likely to include:
- The banking sector. The ECB is keen to see further consolidation across Europe and there remains scope for more activity in Cyprus.
- General M&A activity across all sectors but particularly in tourism and retail. Businesses hit hard by the implications of ‘lockdowns’, quarantines, and mandatory capacity reductions risk insolvency which should lead to disposal of non-core activities and M&A activity in a bid for ‘survival’.
- Large scale development projects. A key element in the government’s plans to restore Cyprus to economic health post pandemic is the acceleration of several significant infrastructure projects currently ‘in the pipeline’. These include the construction the Cyprus’ LNG import facility, the nation’s largest and most expensive energy project, which has been awarded to a consortia led by the state-owned China Petroleum Pipeline Engineering. In addition, the redevelopment of the Larnaca Port and Marina area has been announced, with the preferred consortia having been green lighted to put in place relevant licenses and permissions in 2021.
- Further activity in the energy sector as the electricity market becomes fully liberalised.
- Headquartering of more, mainly high-tech firms, in Cyprus including start-ups.
- General ‘knock on’ work from the consolidation and survival activities of businesses across the EU and the world.
- Brexit. Some UK and other non-EU companies previously based in the UK seeking to remain active in Europe have chosen to establish a base in Cyprus due to historic ties, familiarity with the common law legal system and, the widespread use of English as a business language. In 2019 a significant move occurred when P& chose to register its English Channel fleet under the Cyprus flag. Many other UK firms followed suit.
All in all the Corporate and Commercial landscape in Cyprus remains positive and looks set for significant growth as the world economy begins its emergence from the Covid disruptions.