Elias Neocleous & Co LLC

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 1st 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 22nd 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: Submit claims remotely. Access electronic case files Pay fees and commissions remotely. Access up to date information about the progress of ongoing cases. 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 20th 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

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.  

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 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. 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. 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. 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. 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: ‘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’. ‘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. ‘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. ‘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

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 4th and  5th 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.