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BY CHRISTINA PIERIDES
Through its favourable tax system as well as its strong banking and professional services infrastructure, Cyprus has succeeded in establishing itself as a reputable International Financial Centre. Accession to the EU, and the elimination of exchange rate risk through adoption of the euro, have positioned Cyprus to become an ideal gateway for inbound and outbound EU investors.
There are many opportunities to build on this success. Indeed, the Ministry of Finance has set as a priority the enhancement of Cyprus’s attractiveness as a financial services centre. A number of important factors are already in place, since Cyprus offers one of the lowest tax rates in the EU and has negotiated a number of advantageous double tax treaties, while at the same time complying with all EU requirements as well as OECD requirements against harmful tax practice. Moreover, the island is strategically located and has high living standards, the labour force is highly qualified and there is a wide network of legal, accounting, banking and shipping services.
In the midst of the financial crisis, there have been some external developments that create new opportunities towards the above goal. Following a renewed global resolve to act against tax havens, the OECD has included Cyprus in a “white list” in recognition of the island’s implementation of internationally agreed standards of cooperation. Additionally, Cyprus and Russia have successfully renegotiated their double-tax treaty, effectively ending the inclusion of Cyprus in Russia’s “black list” of countries offering preferential tax treatment.
In order to seize the external opportunities and further increase Cyprus’s attractiveness as a financial services centre, the following measures need to be taken:
1) Non-UCITS legislation
The current law addressing funds such as hedge funds, funds targeting professional investors and high net worth individuals (collectively referred to as non-UCITS), is outdated. Furthermore, it allows for the registration of private investment schemes but does not allow for the registration of investment schemes targeting professional investors. With an updated legislation, Cyprus will be well placed to cater to the increasing demand for registration of funds from Russian and other third countries which are looking for an EU-regulated jurisdiction to be based in.
Another problem that needs to be addressed is the regulation of UCITS and non-UCITS funds by two separate regulators.
2) Enhance sophistication of local capital market
Legislation is now being drafted to permit the issuance of covered bonds. This effort should be intensified. As far as sovereign debt is concerned, there is a need to restructure the primary and secondary market for government bonds since at present there is no depth in the market and the secondary market is practically non-existent. These problems have been identified several years ago and the decision was taken to restructure the operation of the primary and secondary markets, while introducing primary dealers. However, there have been substantial delays in implementation.
3) VAT reform
A number of steps can be taken to clarify the VAT regime by issuing detailed guidance on the VAT treatment of financial services. This would reduce the number of rulings requested from VAT authorities and in turn would reduce the administrative burden for financial services companies and government authorities alike.
A further measure would be to allow for the creation of cost-sharing groups in the financial services sector. This would have the effect of allowing a financial organisation to pool investments and re-distribute the costs for these investments exempt from VAT from the group to its members. This would make it attractive for financial organisations to set up centres of excellence to take advantage of economies of scale. In combination with Cyprus’s favourable income tax regime, this measure is expected to attract foreign direct investment as financial groups from EU members and third countries would find it attractive to locate their centres of excellence here.
4) Efficiency of regulators
Following Cyprus’s accession to the EU, numerous financial and investment services firms have been attracted to Cyprus, taking advantage of the EU passport to offer their services to clients across the EU. The number of regulated firms has increased from 18 prior to EU accession to around 70 to date, and numerous more firms are anticipated, especially from Russia. It is important for the local regulator to have in place all necessary resources and organisational set-up to be able to respond quickly to their questions and permit requests.
In the area of company registration, procedures should be automated to expedite registration. It takes 2 – 3 weeks to register a company in Cyprus, whereas competitive jurisdictions boast registration periods of 2 – 3 days.
5) Leasing
Currently in Cyprus the only type of leasing being offered is hire-purchase, whereas financial leasing is not very widespread due to the existence of tax disincentives. It is necessary to amend the tax legislation in order to remove these disincentives.
To conclude, it needs to be emphasized that the above measures should be implemented without any further delay. Global developments in the financial sector are fast and volatile, and any delay of two or more years to implement the above could mean that the opportunity to create a competitive advantage for Cyprus would pass us by.
Christina Pierides is a Senior Officer at the Association of Cyprus Banks
www.acb.com.cy , [email protected]
