Foreign Direct Investment (FDI) in Cyprus: protection and investment trends

Posted on 07 Jul 2014, by Eleni Drakou

According to the 4th Edition of the Organisation for Economic Co-Operation and Development (OECD) Benchmark Definition, Foreign Direct Investment (FDI) is a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (the direct investor) in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor.

The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of the direct investment enterprise by the direct investor is evidence of such a long-term relationship.

According to the Central Bank of Cyprus (CBC) the long-term interest on the part of the foreign investor exists directly or indirectly between two entities through a third party, which has a direct investment relationship with the other two. Consequently, it might be possible for a number of enterprises to be in a direct investment relationship regardless of whether the relationships involve one or more chains. This relationship can, therefore, extend to indirect relationships such as subsidiaries of direct investment enterprises, subsidiaries of subsidiaries, associates and sister companies.

Cyprus has developed into an international quality business centre that offers specialized services and rewarding business opportunities that cater for the diverse needs of international investors by enhancing the ease of doing business. According to the United Nations Conference on Trade and Development (UNCTAD), Cyprus has ranked among the High Potential-High Performers for FDI growth for 2007-2010. The World Bank’s Doing Business Report 2014 ranked Cyprus 39th out of 189 Economies and 16th out of the 28 European Union (EU) countries for the ease of doing business. Forbes Magazine Best Countries for Doing Business Report (2012) ranked Cyprus 25th out of 144 countries.

Consistent with the Coordinated Direct Investment Survey (CDIS) led by the International Monetary Fund (IMF) for 2012, the top five sources of inward direct investment in Cyprus were the Russian Federation, Greece, the British Virgin Islands, the United States, and the United Kingdom.

The Cyprus government has liberalised the Foreign Direct Investment Policy both for EU citizens and for investors from third countries. Foreign investors have the opportunity of participating in most sectors of the economy with equity participation of up to 100% in any Cypriot enterprise and without a minimum level of capital investment. As of 1st October 2004 foreign investors can register a company directly with the Registrar of Companies, and obtain any licence, if needed, from the appropriate authority according to the nature of investment on equal terms with local investors.

Only certain restrictions remain both for EU and non-EU investors in a few sectors; notably banking, tourism, real estate, tertiary education, public utilities, radio and television broadcasting, newspapers and magazines and airlines. Where restrictions are imposed investment proposals need to obtain a prior approval in consultation with the appropriate government department. Each investment proposal is considered on its merits.

Important fiscal incentives for foreign inward investment ensure that holding and investment companies incorporated in Cyprus will remain attractive and competitive. In addition to the fiscal incentives, a variety of non-fiscal facilities have been developed to promote FDI in Cyprus. Non-EU residents may obtain a permanent residency permit with the purchase of a private house. Non-EU residents may also be able to apply under the Cyprus Investment Programme. The Council of Ministers has adopted a Scheme for Naturalization of investors by exception on the basis of subsection 2 of section 111A of the Civil Registry Laws (N. 141(I)/2002).

Direct investments include the purchase of Cyprus government bonds or debentures, shares in Cyprus companies, acquisition of local businesses, investment in real estate, land development and infrastructure projects, and participation in a joint venture for the execution of a government project in Cyprus. Successful applicants can enjoy equal treatment as nationals, including with regards to social benefits, welfare and education.

The Cypriot regulation and legislation is encouraging foreign investments. Tax legislation is constantly being updated and improved in order to increase the island’s competitiveness as a centre for inward investment. New legislation regarding shipping tonnage reinforced Cyprus’ status as a ship management centre, an updated law on trusts has enhanced asset protection among other features, and a new yacht scheme has given Cyprus the lowest VAT rate on yacht importation in the EU. In addition, a law that exempts 80% of intellectual property income from taxation and a financing scheme, which allows Cyprus companies to be the beneficial owners of loan interest, has passed. Also, the majority of international transactions are exempted from taxation.

The official government policy is welcoming and actively protecting FDI. Foreign direct investment protection in Cyprus stems from national law, the domestic and international investment legislation, the investment treaties in which Cyprus is a signatory, as well as the European legislation and policy.

The domestic legislation and, more specifically, pursuant to Article 23 of the Constitution of the Cyprus Republic, safeguards the right to property by declaring that every person has the right to acquire, own, possess, enjoy or dispose of any movable or immovable property and has the right to respect for such right. The right for petition, guaranteed under Article 29 of the Constitution, is also of particular importance as it declares that a person is entitled to request remedy in the case of violation of the person’s fundamental rights by any public authority. Moreover, any decision, act or omission of any executive or administrative authority that harms the legitimate interests of any person can be subject to administrative recourse pursuant to Article 146 of the Constitution.

Protection is also afforded by the EU law through the Treaty of Lisbon (ToL -Article 207), which provides integration for the FDI into the EU’s Common Commercial Policy (CCP). Foreign direct investment is a key element of the EU’s trade policy and, as such, the EU regards FDI a means to promote development as well as economic and social growth. The EU’s investment policy focuses on the negotiation of investment rules in the context of its trade negotiations that provide EU investments with legal certainty and a stable regulatory environment to conduct business. The European Commission now negotiates on behalf of the EU investment provisions in certain Free Trade Agreements. These new provisions will set up a legally binding level of protection for investments and will be accompanied by investors-to-state dispute settlement mechanisms. Cyprus’ accession to the EU has elevated the efficiency with which foreign investment is treated.

At an international level Bilateral Investment Agreements (BITs) and Multilateral Investment Agreements (MITs) define the protection framework of FDI in Cyprus for each signatory country. These agreements aim to achieve the fair and equitable treatment of investors, the protection and security of investments, the free transfer of investment and returns and the protection from expropriation without compensation.

Cyprus has signed a number of Multilateral Investment Agreements (MITs). Cyprus has also signed Bilateral Investment Agreements (BITs) with the following countries: Armenia, Belarus, Belgium and Luxembourg, Bulgaria, China, Czech Republic, Egypt, Greece, Hungary, India, Jordan, Lebanon, Malta, Moldova, Poland, Romania, San Marino, Serbia, Seychelles and Syria. Moreover, the BITs with Albania, Iran, Israel, Italy, Montenegro, Qatar and the Russian Federation, are waiting for ratification to enter into force.

BITs contain provisions on the free and undistorted transfer of capital, the legal security for property rights, as well as the guaranty of non-discrimination standards to foreign investors. Bilateral Investment Agreements also include the obligation not to expropriate without immediate, effective and full compensation. The provision of dispute settlement mechanisms in the form of arbitration provides the investors with the option to file a claim against the host state, thus circumventing national courts.

Protection is also afforded by international investment law. The safeguards relating to the protection of foreign investment and proprietary rights include the prohibition of confiscatory taxation, the obligation of non-discrimination, the standard of treatment of foreign investors, the principles of natural justice and the observance of fundamental human rights and the doctrine of abuse of rights. Cyprus has adopted and embodied in the Cyprus Constitution and in the domestic legislation the principles of international investment law.

Additionally, the Republic of Cyprus has signed the International Center of Settlement of Investment Disputes (ICSID) Convention, which is a self-contained system deriving authority from its status as a World Bank’s institution and provides resolution of disputes through conciliation or arbitration procedures. ICSID was established under the ICSID Convention of 1966 which Cyprus has signed and ratified. ICSID is an impartial international forum providing facilities for the resolution of legal disputes between eligible parties through conciliation or arbitration procedures. ICSID can be utilized for the resolution of any investment dispute arising from an investment made by a national of a contracting state in the territory of another contracting state.

Cyprus is also a signatory to the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA Convention), an autonomous international financial organization. MIGA provides non-commercial insurance cover for cross-border investments into developing countries. MIGA's guarantees protect investors against the risks of transfer restriction, expropriation, war and civil disturbance, breach of contract and non-honoring of financial obligations. Most sectors are eligible for MIGA guarantees, including, but not limited to financial, infrastructure, oil and gas, mining, telecommunications, services, agribusiness and manufacturing.

Foreign investors are also protected in respect of taxation issues. Cyprus’ favourable tax regime makes it one of the most attractive centres for FDI in Europe. At 12.5%, its corporate tax rate is one of the most competitive in the EU. Moreover, there is no withholding tax on dividends for non-resident companies and income and labour taxes are also relatively low. The island’s extensive network of close to 50 double taxation treaties has strengthened its position as a business gateway and today the country is home to more than 270,000 companies.

The Cyprus Investment Promotion Agency (CIPA) provides investors with support and facilitation services. To this end, CIPA collaborates closely with the commercial departments of the Ministry of Energy, Commerce, Industry and Tourism, other governmental departments, as well as with the private sector.

Investment opportunities in large-scale projects such as the development of luxury marinas, golf courses, casinos, and multi-use residential complexes have been also attracting significant interest from abroad. These projects are also part of a wider project to upgrade the Cypriot tourism product. Key investment possibilities are in special interest areas such as medical tourism, sports, nautical and agro-tourism, conferences, theme parks and managed attractions. Due to the current economic climate, property buyers can find exceptional properties at attractive prices. Medical centres and hospitals that cater to the growing market of international medical tourism are also an increasingly interesting opportunity for investment into Cyprus.

International banks have increased their presence on the island over the years and with the current restructuring of the local banking sector there are opportunities for more foreign banks to set up operations in the banking industry. Other investment opportunities in the banking and financial services are private equity and venture capital projects, mergers and acquisitions, and the financing of large infrastructure projects. Privatization is also an opportunity for growth and investment. Research and private education catering to the foreign market have been growing steadily, transforming Cyprus into a major educational centre in the Eastern Mediterranean.

The shipping sector is also providing interesting opportunities for foreign investors. Cyprus is the only EU-approved open registry where non-Cypriot nationals can register a ship and enjoy the variety of benefits of the competitive Cyprus flag. The proven advantages of Cyprus’ shipping legislation and the favourable taxation, the ratified international conventions and the general framework of shipping industry have attracted many of the world’s most influential names in shipping to base themselves on the island.

Foreign investors are becoming increasingly interested in the energy industry in Cyprus both in the oil and gas sector and the renewable markets. The biggest potential for investment in the coming years is expected to be the hydrocarbons sector.