Up to the 1970s Cyprus was viewed as a trade stop between the coastal countries of those continents, leading it to be positioned as one of the world's major re-exporting hubs. Although it still holds that status today, the island has developed into a truly global business services center with 79% of its 2010 GDP attributed to the services sector.
Along with its strategic business locality, Cyprus provides the most essential criterion of any successful services industry; a well educated, multilingual, business savvy and service oriented workforce. In 2010 it ranked 35 out of 169 countries on the Human Development Index (HDI) - more than twice superior to that of fellow offshore island Mauritius which ranked 72. The HDI ranks nations based on their inhabitants' health, education and income. Financial services are at the heart of the economy for the Mediterranean's third largest island. The Central Bank of Cyprus' breakdown of Foreign Direct Investment inflows (FDI) by economic activity illustrates that importance. "Financial Intermediation" accounted for a whopping 82% of the €3.6 billion the country attracted during 2009.
Cyprus has been a member of the WTO since 1995 and, after implementing several changes to its tax and financial reporting systems, was granted membership to the European Union in 2004. It finally adopted the Euro in lieu of the Cypriot Pound in 2008. Utilizing a single currency with its main trading partners across Europe lowers the risk of fluctuating exchange rates and introduces a more cost efficient trading environment. It also meant that the Cyprus Stock Exchange would be further integrated with the Athens Stock Exchange since trading in both markets is now carried on in Euros. The two exchanges had launched a joint trading platform in 2006. Market value of traded shares on the Cypriot stock market was valued close to $5 billion at the end of 2009, and it currently consists of some 130 listed companies. Becoming the EU's most south-easterly member, however, did not come without cost.
Post EU accession.
In the course of seeking accession to the EU, it was clear that Cyprus had to alter many of its tax practices and significantly improve its financial reporting transparency. This meant all but uprooting that financial structure which had previously attracted so many businesses to the island; the "offshore" system.
This adjustment campaign reached its peak on Jan 1st 2003 when the government announced a new standardized corporate tax rate of 10% on worldwide income for all country-resident businesses. It defined those businesses as being managed and controlled from within the island. In addition to the new tax legislation, the identity of all beneficiaries upon company registration or change of ownership must now be disclosed to the relevant authorities. With these changes in full swing, Cyprus removed its name from worldwide lists of countries with detrimental tax practices. Since then it has been well positioned to be Europe's top destination for holding companies and other business intermediary offices. The total number of registered companies on the island at the end of June 2011 exceeded 246,500.
As per the new tax directives, a Cypriot Holding company is now effectively fully exempt from corporate tax on its incoming dividends from foreign subsidiaries. It can also enjoy an exemption from the 15% "special defense contribution" tax (SDC), which is usually levied on dividends distributed to residents. To avoid being taxed with the SDC, the Cypriot company would need to hold at least a 1% stake in the foreign company. Conversely, non-resident shareholders of the holding company are exempt from any withholding tax. This applies to distribution of dividends, interest or royalties and as long as no intellectual property rights are used in the country.
Financial reputation and treaties.
Cyprus' ongoing shift from tax haven to a tax-favorable jurisdiction for international businesses was cemented in April 2009 when it was "white listed" by the Organization for Economic Co-operation and Development (the OECD). This position was also strengthened in 2010 when both Italy and Russia removed the country from their respective "black list" of tax havens.
After becoming a member of the EU, the Cypriot government has been fully focused on revising and enhancing its Double Taxation Agreements (DTAs). These types of agreements ensure that an individual or business entity's income is not taxed twice by the signatory states. Russia, Germany, Denmark and Ukraine are among the most recent to adopt revisions to their double tax treaties with Cyprus. In conjunction with those efforts, the island has entered into discussions with numerous new countries so as to broaden its network of treaties. It recently completed DTA negotiations with the United Arab Emirates and Kuwait in a bid to further reinforce its role as an investment channel between the Middle East, North Africa and Europe. In total, Cyprus has close to 50 DTAs (most of which have already been ratified).
Banking.
Cyprus has successfully branded itself as an international banking center with a reputation of outstanding service, client secrecy and a wide network of correspondents around the world. Common banking practices and legal structures are based on the UK model and the system as a whole is exceptionally mature and highly developed. The Central Bank of Cyprus oversees and regulates this sector in accordance with the EU directives on banking regulations while adhering to the recommendations of the Basel Committee on Banking Supervision.
In addition to the local banks, more than 30 International Banking Units (IBUs-branches and subsidiaries of foreign banks) have been established on the island. These IBUs are usually restricted to dealing with non-residents and non-resident companies registered in Cyprus unless authorized by the Central Bank, and are exempt from most of the monetary guidelines and lending regulations which local banks have to abide by.
From 2004 onwards IBUs have been allowed to provide full banking services after Cyprus freed the movement of capital and payments in the banking sector. Many of these services are designed to help international businesses with their offshore banking needs, starting with the ability to open a bank account in any of the world's major currencies. 24/7 Electronic banking and sophisticated cash management services support them with the handling of regular payments and the centralized administration of several bank accounts. Business loans and credit facilities, including short term financing and working capital overdrafts, are readily available for firms in need of funding. Those involved in trade can benefit from the trading finance services such as arranging letters of credit or guarantees, import-export financing and trade risk management. Private banking offers perhaps some of the most attractive financial services provided on the island. Interested corporations or individuals could possibly benefit from portfolio management and wealth management services, as well as gain access to global stock exchanges.
An increasing number of banks and financial institutions are keen to benefit from servicing the trading route which passes through the island's ports and to provide financial services to the many international companies based in the country. During 2009, the entire sector had loaned out over €46.6 billion with deposits close to €45.5 billion, as reported by the Cyprus Investment Promotion Agency.
Shipping and maritime.
As a growing international hub for trade and commerce activities, the island's shipping industry has been steadily growing. Today it boasts an impressive merchant fleet ranking 3rd among the EU member states and 10th globally. Cyprus and Malta are the only two open registry countries within the European Union; non-Cypriots can own and register vessels in the country. Registration fees depend on the ship's gross tonnage and are set with a minimum fee of €213 and a maximum of €5,125. Cyprus was granted approval by the European Commission to implement a new tonnage based taxation law in March 2010, under which the annual tax is calculated according to the tonnage and age of the ship. Shipping companies registered in Cyprus are freed from income tax, whether on profits or dividends distribution. They are also exempt from any taxes on capital gains and on the sale or transfer of ownership of a vessel (or shares of a shipping company). With the industry famous for high quality services and rigid safety standards, Cypriot ships are entitled to either national or favorable treatment in ports across 29 countries through a network of bilateral agreements. Yachts flying the Cypriot flag can also enjoy that treatment and benefit from competitive registration fees and tax reductions, especially on VAT.
China - Cyprus.
Chinese Vice Foreign Minister Fu Ying's March 2011 visit to Cyprus capped 40 years of continuously improving diplomatic and economic relations between the two countries. Chinese goods accounted for 5.5% of total imports to Cyprus in 2009, ranking it 6th among the country's import partners for that year. An Agreement on Maritime Transport between both nations and a DTA have been in force for more than two decades.
Efforts to enhance business relations are by no means limited to high governmental levels. China Development Bank and The Bank of Cyprus recently signed a Memorandum of Understanding which led to the latter receiving a five year term loan of €300 million in May. The main objective behind the MoU is "to jointly finance investments; particularly in the areas of shipping, renewable energy and infrastructure projects" read an official statement by The Bank of Cyprus Group. The second largest Cypriot banking group, Marfin Laiki Bank, has become the first bank in Cyprus to enter the Chinese market with its recently established representative office in Beijing.
As China looks to build up its cooperation with the EU, Cyprus will prove to be a valuable partner. In his latest European visit premier Wen Jiabao hinted at the possibility of the Chinese government purchasing yet more Euro bonds to help ease out the current debt crisis. With an eye on its exports, it is clear that Beijing is highly interested in the economic stability of its major trading partner.
Home to the second lowest corporate tax rate in Europe, Cyprus is set to continue attracting Chinese trading and offshore businesses for many years to come.
An eye on the future.
Despite its high exposure to economically troubled Greece, Cyprus' economy is expected to grow by 1.5% to 2% this year as estimated by the International Monetary Fund (IMF). While holding a positive outlook for the Cypriot economy for 2012, the IMF estimates the country's GDP per Capita at PPP to surpass $28,500 for the current year. In light of a globally recovering economy and the resulting tightening of finances around the world, keeping a steady inflow of overseas investments is crucial for Cyprus. Realizing the importance of infrastructure in continuity of attracting these investments, government spending on infrastructural projects has been on a rise since 2007. According to the latest Cypriot Finance Ministry report on Economic Development, more than €0.5 billion was spent on such projects during the past year alone. These amounts are projected to increase by almost 4% near the end of 2011.
At the 2nd annual 2011 Mediterranean Oil and Gas Conference, the government announced it was planning to diversify its energy sources towards including natural gas. The eastern Mediterranean's potential for oil and gas prospects poses great potential for Cyprus as it could stand to benefit from new possible energy routes to Europe. Although exploration activities are ongoing, it might require a considerable amount of time before an accurate and concrete assessment is made. China is bound to keep a close eye on these developments.
Overall Cyprus provides international businesses in almost every sector with immaculate services and many flexible tax-saving structures, while recently reforming itself into a globally reputable financial center abiding by international guidelines on transparency and other sensitive business issues. This delicate balance is perhaps the country's main strength as inward investments into the EU seem set to continue being channeled through its several industries.
