Cyprus: Cyprus Chapter Of International Protection Of Foreign Investment - Second Edition

Introduction

The strategic location of the island of Cyprus and its considerable wealth in ancient times have made it subject to occupation by several different nations and civilisations. These occupations began many centuries before Christianity and ended in 1960 when the island became an independent republic, after 82 years as a British colony. Although the invasion of the northern part of Cyprus by Turkey in 1974 had a traumatic effect on different areas of growth, it did not hinder the economic development plans launched in 1962.

Strategic planning for economic development continues to be an essential goal of the Cypriot government. The importance of international trade and foreign investment as vehicles to offset the losses suffered by the economy of Cyprus following the Turkish invasion in 1974 was recognised at once. Foreign investment, whether direct or indirect, or in or through Cyprus, in the form of financial capital and human resources, as well as technology, know-how, and expertise was, therefore, greatly encouraged.

On 1 May 2004, Cyprus was admitted to full membership of the European Union (EU). On 1 January 2008, it adopted the euro as its national currency. In the run-up to EU membership, in order to attract inward investment and enhance economic prosperity in Cyprus, the government liberalised foreign direct investment policy for both EU and non-EU nationals. In all but a very few strategic sectors of the economy (ie, those perceived to relate to national and public security, such as banking and media), foreign investors may now participate with no limits on equity holdings and without any prescribed minimum level of capital investment. In general, foreign investors no longer need approval from the Central Bank of Cyprus as was previously the case, and they may invest and do business in Cyprus on equal terms with local investors.

In 2006, Cyprus enacted legislation to allow the formation of European public limited companies (SEs) in line with EU Council Regulation 2157/2001. The aim of the SE regime is to allow companies incorporated in different member states (and in Iceland, Liechtenstein, and Norway) to avoid the legal and practical constraints arising from the existence of different national legal systems and to merge or form a holding company or joint subsidiary that is able to operate throughout the internal market and beyond. Incorporation as an SE can significantly reduce the costs for businesses operating in more than one member state of the EU and allow them to restructure quickly and easily to exploit the advantages presented by the internal market.

One of the major factors determining the attractiveness of an SE is the tax regime of the host country. Cyprus's low tax rates, its extensive network of double-taxation agreements, and its simple, modern tax legislation make it extremely attractive as a location for SEs. It is, therefore, likely that businesses from all over Europe will find it advantageous to re-incorporate as Cyprus SEs.

Existing companies from other member states may be merged into an SE in Cyprus without any tax cost, since Cyprus has fully implemented the EU Mergers Directive. To further facilitate inward investment, the Ministry of Commerce, Industry and Tourism has established a 'one stop shop' Foreign Investors Service Centre tasked with co-ordinating and simplifying potential investors' dealings with the authorities.

Admission of Foreign Investment

In General

There are a small number of sectors, notably banking and tourism, where foreigners remain subject to maximum equity participation limits. However, in general, foreigners wishing to register a company in Cyprus or to buy shares in a Cyprus company need only to make the appropriate application to the Registrar of Companies.

Restrictions do remain on foreign investment for both EU and third-country citizens in the areas of real estate, tertiary education, public utilities, radio and television stations, newspapers and magazines, and airlines. Investment proposals concerning these areas must obtain prior approval from the Central Bank of Cyprus, which may consult with other government departments as appropriate. Each investment proposal is considered on its merits.

Investment by European Union Residents

All restrictions relating to the minimum level of investment and the maximum allowable percentage of participation in companies were abolished in 2000 in relation to resident citizens (whether individuals or corporate bodies) of the member states of the EU and the European Economic Area (EEA).

Restrictions on the acquisition of immovable property were removed in 2009 after a five-year transition period and the only remaining restrictions apply to specific sectors listed below under the heading 'Excluded Activities', and to regulated sectors such as financial services.

Investment by Non-European Union Residents

In General

Foreign direct investment in Cyprus from non-EU countries was fully liberalised with effect from 1 October 2004, and minimum investment amounts and maximum participation percentages were generally abolished, although licences from different public authorities may still be required for certain specific activities.

There is now no difference between companies carrying on business outside Cyprus (previously known as international business companies or offshore companies) and companies carrying on business inside Cyprus. Up to 100 per cent of the share capital of a company quoted on the Cyprus Stock Exchange may be acquired by a foreign investor. Restrictions do exist in respect of the purchase of shares in regulated sectors such as banking and other financial services. These are identical to those applied to EU citizens.

Excluded Activities

Foreign participation in the provision of public utility services covered by specific legislation also is prohibited. Such services include production and distribution of electricity, telecommunications services, postal services, agricultural insurance, and television and radio stations.

Economic Citizenship Programme

Cyprus has an 'economic citizenship' programme, granting accelerated citizenship to applicants who make substantial investments in Cyprus (above €2.5 million) or who are substantial shareholders of a company incorporated and doing business in Cyprus, the principal offices of which are situated in Cyprus, which employs at least ten Cypriot citizens and which has paid at least €500,000 per year to public revenues over the preceding five years. Up to two applications for naturalisation may be submitted in respect of each such company. The applicant must also have a clean criminal record and be the owner of a permanent residence in Cyprus with a value of €500,000 or more.

Regulation of Admission

In General

Regulations on the admission of foreign investment into Cyprus are divided into:

• Those imposing restrictions on foreign investment; and
• Those offering incentives for foreign investment.

Restrictions on Foreign Investment

Exchange Control. As a member of the Eurozone, Cyprus has minimal exchange control. As a condition of a financial support package for Cyprus agreed in March 2013, the operations of Cyprus's two largest banks were scaled down and temporary controls over transfers of funds via banks in Cyprus were put in place. It is important to note that these controls affect only banks in Cyprus and do not apply to funds introduced to Cyprus after March 2013. They do not directly affect any Cyprus corporate and trust structures, nor do they detract from the favourable Cyprus holding company regime and the advantages offered by other Cyprus structures, since there is no requirement for Cyprus companies, entities, or trusts to open or maintain bank accounts in Cyprus.

Labour. Cyprus legislation on matters such as entry and stay of EU and third- country nationals for employment and study purposes and long-term residence is fully aligned with the EU acquis communautaire. Persons who have been legally residing in Cyprus for at least five years are entitled to Long-Term Residence Permits that have an indefinite limit. Visa obligations for foreign nationals are in line with EU obligations. Cyprus is a signatory to the Schengen agreement but it has not yet been implemented. Citizens of EU member states have the same employment rights as Cypriots. If they are employed, they must obtain residence permits, to which they are entitled as of right.

Companies investing in Cyprus with the participation of non-residents are considered to be local companies and are treated as such. Thus, employees and staff working for these companies are expected to be residents of Cyprus, taking into account the availability on the island of a highly educated workforce with considerable professional skills. However, there are limited exceptions where no suitably qualified Cypriot or EU nationals are available to fill the required positions in certain companies.

The Immigration Officer at the Ministry of the Interior needs to be satisfied that foreign investors have genuinely sought local staff for those positions before engaging third-country employees. Employers, therefore, should first consult with the District Labour Office and advertise such positions in the local press and, when no suitably qualified Cypriots or EU nationals can be found for the positions in question, foreign employees may be hired. Third- country nationals must obtain a work permit before commencing work in Cyprus. The criteria for granting approval of a work permit to third-country nationals are the following:

• Non-availability of suitably qualified local Cypriot or EU nationals;
• Saving and better utilisation of the local labour force;
• Improvement of working conditions at the workplace; and
• Terms and conditions of employment identical to those for a local.

Where the third-country national is employed because he has skills or knowledge not possessed by locals, the employer must ensure training of a named local employee during the period of the foreigner's employment. Work permits are granted for employment by a specific employer and are normally issued for one year, requiring annual renewal. Foreign-owned companies enjoy a number of benefits, including:

• The ability to obtain indefinite work and residence permits for senior management and other key employees;

• The relaxation of re-entry visa requirements for third-country workers who frequently travel outside Cyprus; and

• The availability of permanent residence permits for management employees who satisfy the necessary criteria.

Taxation

In General

Cyprus has a modern tax regime offering one of the lowest rates of corporate income tax in Europe. Liability to tax in Cyprus is based on residence, which for companies is determined by the locus of management and control. Companies are resident in Cyprus if management and control are exercised in Cyprus, but not otherwise.

Mere incorporation in Cyprus is not enough to establish tax residence. Resident companies are subject to Cyprus tax on their worldwide income and are entitled to benefit from Cyprus's network of double-taxation treaties. Non- resident companies are subject to Cyprus tax only on Cyprus-source income and are not entitled to benefit from double-taxation treaties.

As well as ensuring the benefits of lower withholding taxes, a Cyprus company can ensure that its overseas activities will not be subject to local tax if they come within the activities of a permanent establishment permitted by an applicable treaty. This is clearly an important issue for a trading company. Cyprus has concluded double-taxation treaties with 50 countries, and more are under negotiation.

This chapter is from International Protection of Foreign Investment, 2nd Ed. © Juris Publishing, Inc. 2015 www.jurispub.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.