The legal industry and product offering of Cyprus is set to transform, attracting businesses with more substance and quality, says Elias Neocleous.
With 50 years of history and legal experience, Andreas Neocleous & Co LLC is the largest law firm in Cyprus and recognised as leaders in the South-Eastern Mediterranean region. The forward-looking firm has long been at the forefront of legal developments in the country, catering to individuals, market-leading multinationals as well as international organisations.
How is the legal industry in Cyprus doing at the moment?
The legal industry continues to be strong, but it is going through a consolidation phase. This is a positive development because for some time Cyprus had a situation where demand outstripped supply. It created a sellers’ market where some services did not meet the required high standards of quality and pricing was unreasonable. Today, we have a more balanced situation where law firms have to be more competitive and focus on the quality and efficiency of their service. The consolidation trend is creating more viable and prudent businesses.
Your firm diversified internationally some years ago, how are your operations doing and are you looking at new markets to expand into?
We have relatively small offices in Ukraine and Russia, to provide services and help to our clients operating in those markets. With recent developments in both Russia and Ukraine, we have certainly been affected by the political tension, sanctions and recession. However, we have decided to maintain our offices as we have a long-term approach and established operations in place. Our offices in Prague, Budapest and Brussels are doing very well. We constantly look out for more opportunities and markets we could penetrate either through the establishment of new offices or entering into strategic partnerships with other international law firms. We had plans to set up offices in Dubai, but as we were about to go ahead the Dubai market collapsed and we put things on hold. We continue to look at the Middle East, but cannot ignore the geopolitical situation and potential risk in the region at the moment.
What key developments are currently affecting the financial and corporate services sector?
Due to the automatic exchange of information and increased reporting and compliance regulation, the need for intermediary jurisdictions will become less important. Businesses around the world are increasingly looking at ways to cut their cost burden. The result is that service providers that offer no more than incorporation and maintenance of entities will find it difficult to run a sustainable business. Fewer companies will be set up and the ones being set up will have solid substance and purpose, meaning these companies will no longer request the traditional legal services. The industry and our product offering in Cyprus will transform, we will see more substance and quality rather than quantity. The government and the regulator should in fact strategically advocate this direction and ensure we attract companies of good reputation and high standard. Ultimately, this will be more profitable and sustainable for our economy in the long term.
How would you like to see the legal landscape evolve in Cyprus?
As a lawyer, I must admit we need reforms in our justice system. We must raise the bar on quality and focus on creating a justice system with specialist courts, similar to the UK commercial courts. This would enhance the confidence to litigate in Cyprus, but ideally we should create an environment where clients choose to litigate here. We’ve seen tentative interest from international arbitration and dispute resolution centres looking to establish themselves in Cyprus. There is good scope to make this a reality if we can bring together the private and public sectors, but it’s a long journey from having an idea to implementing it correctly.
What are the key advantages of Cyprus and where do you see potential for growth?
It’s a fact that Cyprus has excellent human capital, but we should not overstate this. There is great human capital literally everywhere and with today’s technological advancements it’s easy to tap into it anywhere in the world. What Cyprus can capitalise on is its strategic geographical location, we are close to some very important areas and we need to build more bridges to markets such as the Middle East, North Africa and the Balkans. The combination of being an established international business centre with great access to these areas coupled with a system based on English law, which is the established international law of business, gives us a solid platform to grow and prosper.
What key markets should Cyprus explore?
The key success factor is diversification. Cyprus should be actively looking at various markets as well as fostering relationships with potential clientele and industries. We continue to see many professional services firms that are over reliant on for example the Russian market, and unfortunately they will suffer in the foreseeable future. Expectations are that things will get worse in the Russian market, with bonds of major Russian companies maturing in the next 18-24 months. External funding is the only way to get refinanced, but this is not available due to the current sanctions. There will be a significant squeeze on available credit in Russia. Just like any other business, law firms also need to be innovative in making informed assessments on the future needs of clients and come up with fast and cost-effective service delivery mechanisms to be able to survive in the future. Cyprus must also increase the number of double tax treaties to facilitate more business, and sign treaties with all fellow EU member states as well countries like Brazil and Kazakhstan. However, if the new OECD initiative to create a model tax treaty that all signatories must implement comes to fruition, it could negate the need for these types of individual treaties.
Is Cyprus still an interesting jurisdiction for investment and headquartering?
Absolutely, but there has to be a business rationale for a company to invest and headquarter in Cyprus. We are very proud to have been part of facilitating the sale of the Mall of Cyprus to the South African Atterbury Group for over €190 million. The timing of that investment, in the middle of the Greek crisis, was critical and a significant sign of confidence in Cyprus. The decision to buy and operate a Cypriot asset of this magnitude, has led the group to also consider setting up headquarters here to run their European investments and oversee potential expansion plans in the region. This is a perfect example of solid business rationale affecting decisions, as coming to Cyprus only on a tax motivation is not sustainable any longer. Creating industry clusters can also facilitate more interest in headquartering, the Cyprus shipping sector has done this successfully and the model could be replicated perhaps with the funds industry.
How do you think the energy sector will develop in Cyprus?
It is hard to predict. The global energy market has changed dramatically over the last few months due to the fall in commodity prices and we are now in a situation where not only the big multinationals are in danger, but also states whose budgets are dependent on the price of oil. The gas finds in Cyprus’ EEZ attracted serious attention and hundreds of millions have already been spent by energy giants exploring our waters. There is real potential, but how these reserves will be developed further is still up in the air. A solution to the political situation in Cyprus would certainly open more avenues and markets. Another opportunity that we have already seen companies take advantage of is setting up operations in Cyprus to offer support services for drilling activities in the entire Eastern Mediterranean region. Cyprus has proven an ideal and secure EU base for companies supporting clients in Israel, Lebanon and Egypt. The new tremendous gas find in Egypt has given new impetus to the argument of making the Eastern Mediterranean energy corridor to Europe a reality.
Cyprus recently announced new tax incentives, will they attract more business and investment?
All incentives are good incentives. They are definitely a step in the right direction, but there is room for improvement. There is turmoil in the financial markets and it is vital that this small island can be looked at as an oasis of stability, especially since we are still haunted by the ghosts of the 2013 bailout. We need to strengthen our image and reputation. The moment we achieve a triple A rating we will know that we have regained our position.
Looking at the future, what are your expectations for the next two years?
The fact that Cyprus survived the events of 2013 proves we are a country with a strong constitution, but repeating mistakes would be catastrophic. We are optimistic about the future, but 2016 will be a challenging year. It’s no secret the balance sheets of local banks are flooded with non-performing loans (NPLs), and unless the numbers are dramatically reduced, Cyprus will not experience any significant growth. Ireland and Spain were able to register high rates of growth following their bailouts by creating so-called bad banks. Cyprus made a serious mistake not following this example back in August 2013. There will be an increase in liquidations, receiverships and restructuring, which will generate a lot of work for the legal industry. Unfortunately, this is a necessary process we must undertake to regain a position of strength and growth. However, it will also bring many interesting opportunities for foreign investors. We will face more competition from other jurisdictions across all sectors, and to tackle this we must be innovative and focus on providing value-added services at a reasonable cost. Cyprus should also be more unified to play a stronger role in influencing EU policy, along with other similar smaller EU states, and become more proactive in debating and implementing new regulation.
Elias Neocleous graduated in law from Oxford University in 1991, is a barrister of the Inner Temple and was admitted to the Cyprus Bar in 1993. He is a founder member of the Franchise Association of Greece, a member of the International Bar Association, the International Tax Planning Association, an honorary member of the Association of Fellows of Legal Scholars of the Centre for International Legal Studies, Vice President/Economy of the Limassol Chamber of Commerce and Industry, member of the Association Europeenne D’Etudes Juridiques et Fiscales, Academician of The International Academy of Estate and Trust Law, appointed by the Cyprus government to the board of directors of the Cyprus Investment Promotion Agency (CIPA) and Honorary Consul of Portugal.