CyprusProfile talks to Petros Theodotou, Director of ServPRO Accountants & Consultants, about prospects for the Cyprus economy.
What key areas of opportunity or growth do you see in the professional services sector?
The Professional Services sector of the economy has proved to be not only the most resilient sector in the recent Cyprus economic crisis, but also the main contributor to the growth of the country. It has also improved the quality and income of the tourism sector by attracting High Net Worth Individuals (HNWI) and investors and their families with higher spending capabilities.
New target markets
There is no doubt that the traditional markets of Russia and CIS countries continue to form the major income of the professional service sector, despite the negative impact of the recent economic crisis. However, the recent years’ tax developments and in particular the Russian CFC rules, the OECD BEPS Actions and the implementation of the CRS reporting will inevitably change the service product mix. It is expected that those developments will have a negative impact on the sector.
New markets may give the answer to the above problem by creating new opportunities and contribute to the growth of the sector. The case of Iran, following the lifting of certain U.S. sanctions under the Join Comprehensive Plan of Action (JCPOA) in January 2016 and subsequent developments, is a good example. The Double Tax Treaty signed between the Cyprus and Iran in August 2015 paves the way for strengthening the business relationships between the two countries. Cyprus, as a member of the EU, combined with the strategic position and the attractive tax regime is a gateway for investments from and to Iran. We should be alert and take advantage of this unique opportunity in line with the lifting of the sanctions against this country.
For a number of years Cyprus companies were mainly used in structures as a special purpose vehicle (SPV) for holding of investments (Holding companies), financing transactions and group companies and back-to-back royalty distributions. However, with the recent developments in the international tax world, the traditional structures can nowadays be challenged by the foreign tax authorities.
It is well recognised that Cyprus continues to offer significant tax and other benefits to foreign investors. It is a challenge for the Cypriot professionals therefore, but also a great opportunity to plan and restructure effectively and provide advice that takes into consideration the current international tax environment. It is expected that the building of economic substance of Cyprus companies will contribute to the image of the country as an international business and financial centre, minimise the risk of a challenge by the foreign tax authorities, increase the income of the professional services sector and improve the economy by offering new job positions.
The amended Citizenship scheme
Another area of opportunity for the professionals and the country is the amended Citizenship Scheme. On 13th September 2016, the Council of Ministers approved on the revised criteria of obtaining Cypriot Citizenship by investment, based on Section 111A(2), subsection 2 of the Civil Registry Laws of 2002 -2016, which significantly lowers the investment requirements thus making the Cypriot scheme more attractive to foreign investors
The revised criteria are in line with the strategy of the Cyprus Government to further promote Foreign Direct Investment (FDI) and attract HNWI in Cyprus.
Cyprus has strong bilateral relationships with the UK and long historical ties going back to the 19th century.
The implications for Cyprus deriving from the UK referendum of 23 June 2016 to exit the EU are still early to anticipate due to the uncertainty the decision involves. One of the immediate effects was the devaluation of the Great Britain Pound (GBP). The devaluation of the Pound and any recession in the UK will indefinitely impact the tourism sector negatively.
It is expected that Brexit will negatively impact the Cyprus economy due to the close connections with the UK but opportunities may also appear for the Cyprus service sector. A number of companies and funds currently using the UK as their base and operating in the EU may need to relocate in order to maintain their EU identity. Cyprus is very well positioned to play a significant role in this scenario and gain new business.
What expectations do you have for Cyprus in 2017
Following the deep recession and the bailout program in 2013, Cyprus has managed to exit successfully the program in March 2016 and to turn the economy on a forward growth track. The growth for the year 2016 was close to 3% and the estimation for the year 2017 is in the range of 2.5%.
Despite the growth, efforts should be continued and coordinated to enhance the stability of the banking sector by reducing the high level of Non-Performing Loans (NPL), reduce unemployment, implement the fiscal consolidation measures and restructure the public sector in order to become more effective and efficient.
The political uncertainty with the negotiations to resolve the Cyprus problem is a major factor that affects the future economy of the island.
The prospects for the Cyprus economy in 2017 appear promising with an expected growth in major sectors of the economy. In 2016 we have experienced a significant increase of income from the tourism sector, which is expected to continue in the current year as well.
The increase of the new company registrations in 2016 by 20% as compared to the year 2015 is another important indicator that supports the good expectations for the year 2017. We have also seen a significant increase in the number of property sales in 2016, which indicates a growth in the construction industry.
Oil and gas opportunities
Energy giant companies were selected during the 3rd licensing round for offshore hydrocarbons exploration in blocks 6, 8, and 10 in the Cyprus Exclusive Economic Zone (EEZ). The government will soon start negotiations with the selected companies in order to agree on the terms and conditions for granting the exploration licenses.
Other developments in the sector include the decision of Total to begin drilling in block 11 of the Cyprus EEZ. Block 11 shares a boundary to the south with the giant Egyptian natural gas field “Zohr” which has been described as the largest field of natural gas discovered in the eastern Mediterranean area.