* Developers worried over side-effects, economists want a diversification of investments
By Kyriacos Kiliaris
In the wake of pressure from European Union partners, Nicosia is considering revising its controversial Citizenship for Investment scheme, while the House has voted an amendment to the relevant law so that the criteria for the naturalisation of foreign entrepreneurs are subject to their approval under regulations to be adopted by 2020.
Debate on the subject has sparked a lot of reaction among developers who fear that any measures hampering investments in real estate may endanger the course of the economy. Meanwhile, economists believe that the government needs to diversify investments.
Brussels has deployed experts to establish fully transparent rules on the granting of EU citizenship by member states, in order to avoid tax evasion, money laundering or security threats, said European Commission Vice President Jyrki Katainen.
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In a recent visit to Cyprus, Katainen criticised the country for having a rather opaque invest-citizenship scheme that offered little data on those who receive passports, with the government perceiving these comments as attempts to single out Cyprus.
Last week, President Anastasiades invited developers to discuss the latest developments surrounding the Citizenship for Investment Scheme in the wake of the latest criticism from EU officials. Anastasiades heard the developers express their objections to the government’s thoughts who also met on Tuesday with Finance Minister Harris Georgiades and Interior Minister Constantinos Petrides.
The sticking point for developers is the government’s intention to increase the cost of investment by EUR 500,000, from the current EUR 2 mln to EUR 2.5 mln.
Talking to reporters after the meeting with the Finance and Interior ministers, Andreas Demetriades, the president of the Association for Large Investment Projects, explained that “if someone buys an investment fund or shares, he will not be subject to VAT, while if he invests in the construction sector he will have to pay 19% VAT, so his EUR 2 mln investment will increase by EUR 380,000. If the investment amount increases to EUR 2.5 then the actual amount he will have to pay will be closer to 3 mln.
“In any case, the EU did not mention any objection about the amount,” he said.
Developers are also concerned over a suggestion to set up a special fund for research and innovation to which each applicant for citizenship will have to contribute EUR 80,000, citing the example of Malta, which has also been criticised by the Commission for a government levy for passport issuance.
Talking to the Financial Mirror, the President of the Fiscal Council, Demetris Georgiades said that the real issue is that while these kind of schemes have an expiration date, Cyprus has not taken any measures for when this will be, concentrating resources in the real estate sector.
“The scheme will naturally end either because at some point the available land will be used up, or the available infrastructure will not be able to support such developments, or because of interventions by third parties such as the latest intervention by the European Commission,” said Georgiades.
Long-term effects
Referring to the economic impact of the passport granting measure against an investment of EUR 2 mln, he said that during the post-crisis period any measure that would give a boost to the economy was naturally welcomed, however the problem was that the scheme was adopted without taking into consideration the long-term effects.
“While during the first years the scheme helped the economy to regain its lost momentum, the problem is that as the scheme started bringing more and more revenues, the focus turned to real estate leaving other sectors of the economy on the cutting room floor. At the same time, the dependence of public finances on the scheme is ever-growing,” said Georgiades.
He added that benefits from this type of activities are not allocated equally to the entire of the economy.
“This has resulted in people criticising the government that it has helped a specific group, leading to reactions from other groups who have come forward with their own demands,” he said.
Georgiades explained that while a group has gotten richer helped by state intervention, rents have reached new records while lower income groups see no increase in their income. This group is now demanding that the state intervene and correct matters, with the government having to satisfy their demand by preparing a number of schemes intervening to bring rents down.”
He explained that this is a risk as the state is creating permanent expenses, while income from the scheme will not be permanent. “What will the state do once the programme comes to an end one way or another? Will it stop the programmes sponsoring cheaper rents?” asked Georgiades.
He said, however, that putting an immediate end to the scheme would bring about a chain of reactions, as no matter how small, the benefits of the scheme have trickled down to lower social layers.
“After many years of being unemployed, a number of builders, electricians and other workers found employment due to real estate projects targeting high income foreign investors eyeing the Cyprus passport. So, it will be very hard for such a political decision to be taken,” said Georgiades.
He said that the problem of the scheme is that there is a focus on real estate drawing resources from other sections of the economy.
As the president of the fiscal council explained, if the scheme goes south, then the economy will be in trouble as it will be heavily dependent on the real estate.
“If the scheme is forced to stop, then there will be a multiplier effect on various services and facilities set up to cater for the investors participating in the scheme, such as law firms and services accommodating investors’ dealings with state bureaus,” said Georgiades.
Commenting on what needs to be done, Georgiades said that the government needs to draw up a policy which will plan out how Cyprus will deal with the issue in the long run, stressing that “this is something that we should have done from the time when the scheme was brought to the table.
Allegations of corruption and tax evasion
Dr. George Theocharides, Associate Professor of Finance at the Cyprus International Institute of Management (CIIM), adding to what steps need to be taken, said that the government needs to urgently address the negative aspects of the Citizenship for Investment scheme.
“On the one hand, the government has to deal with accusations and allegations that the scheme essentially facilitates corruption, money laundering and tax evasion. On the other hand, the government needs to address the distortion caused in the real estate market with prices being pushed up by projects for foreign investors. With prices reaching a record high, especially in Limassol, locals are finding it more and more difficult to buy or even rent a place to live,” said Theocharides.
He said that he finds that the government is on the right path by trying to make the criteria of the scheme stricter, however, he also believes that the government should find ways to direct foreign investors’ interest to other sectors of the economy, such as shipping, energy and education.
“This will minimise problems and we will have taken steps towards proving wrong the critics of our Citizenship for Investment scheme,” said Theocharides.
Another economist, wishing to maintain her anonymity, is worried over the course the matter has taken with the government concentrating on the financial aspect of the scheme.
“The European commission is not concerned over whether an investor will pay an extra half a million or will give some money to the innovation fund set up. They are more concerned over the fact that the European passport has become a commodity which can be bought, and the exploitation around it. Corruption and money laundering of course are a concern for the EU but are secondary,” the economist said.
Also appearing concerned over the way the government has handled the issue on a communication level, the economist said that she feels that the EU is put off by Anastasiades’ stance. Stressing that while the EU did not single us out, the President’s confrontational stance saying that Cyprus is targeted by the EU will only cause problems.
“These are the same institutions we are working with to restructure our banking system. What do we expect their stance to be in such matters when we treat them this way?” she concluded.
