The recent developments on limited Cyprus’ Double Tax Agreement with Russia, and subsequent implementation of the Controlled Foreign Corporation rules in Ukraine have caused many to speculate that they will most probably follow Russia to increase the taxation of dividends paid by Ukrainian subsidiaries toward their Cyprus holding companies.
This, combined with the EU’s push for the harmonisation of tax systems across Europe to eradicate the competition between EU member states by offering unfair tax advantages, benefits and credits will inevitably lead to a change in demand of professional services that Cyprus lawyers, accountants and service providers are offering. One of the possible outcomes is the consolidation of professional firms which will wipe out small family firms and those who have benefited from the past demand.
Cyprus banks were severely hit by the Financial Crisis back in 2013 when the government introduced the strict bailout terms. The substantial amounts were lost not only by international businesses but by the local ones as well. The bailout has undermined trust in Cyprus as the regional financial centre. However, thanks to the Cyprus government’s smart move to offer Cyprus passports for Investment; foreign investors have started to bring much-needed funds into the Cyprus economy.
Cyprus has also heavily benefited from the tightening of Latvian banks which left only a few European options for Russian businesses. This has helped to bring somewhat of a regional financial hub in Cyprus back on the map. However, the EU and US are keeping Cyprus banks pressured into making it difficult to open a Cyprus bank account even for legitimate international businesses. Many Cyprus-based Approved Service Providers, accountants and lawyers are complaining about difficulties and numerous delays in the opening of bank accounts for international business; even those with Cyprus companies.
How to Avoid the “Eggs in One Basket” Conundrum Cyprus is Currently Facing
Experts in Cyprus are stating that the island should stop its reliance on the single Russian speaking market and expand to the Middle East, Western Europe, and Asia. However, it looks like that those who are voicing this opinion don’t fully understand why Cyprus has ended up serving the Russian speaking market and why Cyprus is not the first choice for companies in Western Europe, which are dramatically different in the way business is conducted in sharp contrast to their Russian counterparts.
It seems very naïve to hope for the same number of clients as the Russian speaking market used to generate. It is even more naïve to think that only high caliber clients will come to Cyprus to replace “dodgy Russian businesses”. The Middle East in its current state is not the market that can substitute the Russian speaking ones. There is strong competition from UAE. It is worth noting that even Cyprus based professional firms have opened offices there to benefit from the tax-free regime being offered.
New Asian clients are not a viable option for Cyprus as well. There are some valid reasons for it. Some of them stay in Singapore and Hong Kong which offer a territorial taxation principle comparing to a worldwide taxation one adopted by most jurisdictions, including Cyprus. Under the territorial taxation principle, income derived outside of the jurisdiction where the registered legal entity is exempt from taxation. There is a small variation between Hong Kong and Singapore on the application of such territorial taxation principle.
How Hong Kong and Singapore are Staying Relevant
Singapore is considering income remitted to Singapore as deemed derived from Singapore, while Hong Kong has a narrower scope for taxation and completely disregards the movement of cash via Hong Kong. As Europeans have more trust in their systems, Asians are prone to consider neighbouring Asian countries through which they prefer to do business with; not even to mention that Singapore and Hong Kong are established world-class international business centres, while Cyprus and the Baltic States are merely regional ones narrowly focusing on Russian speaking markets. This means they have cashed in on recovering these economies after the collapse of the USSR. There is one more advantage that Singapore and Hong Kong are offering: the fact that there is no language barrier, with some reservations for Hong Kong, as all legislative acts, court hearings and reporting are done in English. This is opposite to the local languages that are dominating in European regional centres like Cyprus, Latvia, etc. To fully immerse in the business with Cyprus, a good knowledge of Greek is required. This means that international businesses need some form of intermediary, say for court hearings, etc., which brings up the issue of the cost of operations.
The Greek Language Barrier
What is also negatively contributing to the marginalising of Cyprus as a regional hub is the gradual replacement of English with Greek as a working language in professional and bureaucratic offices. One of the contributors to this is the fact that many parents are sending their children to study in Greek where university education is free for Cypriots. Having little exposure to English as a working language, the younger generation of well-educated Cypriots prefer to speak Greek in the workplace; with some of them even having real trouble to speak English proficiently.
Cyprus is Facing Major Competition from the UK
Another challenge for Cyprus is coming from the UK. With the EU departure date just around the corner and the British governments desire to bring legislation control back to Westminster, the UK might come up with something that helped to make the city of London the second-largest international financial centre in the world by subtly relaxing rules and regulations.
The conservative government is pro-business and there is a great expectation on the future transformation of the UK legal system that might make setting up a UK-based company more financially and tax efficient comparing to those in UAE, Cyprus or the Baltic States. Some time ago, Boris Johnson was talking about Singapore and its success of transforming the country from a third world country to a first world one in such a short period of only 50 years. There could be a case when the UK government may introduce territorial taxation principles to some UK territories. This would bring business activities; money and new jobs to the UK, offloading them from the other jurisdictions, one of which is unfortunately Cyprus.
The question is what the army of Cypriot accountant and lawyers must do if the demand for Cyprus professional services will continue to plummet? It is a good question that the Cyprus government has to answer. It is not easy to transform the islands economy in one fell swoop. Sitting and dreaming about the miracles of demand for Cyprus professional services from Western Europe, the Middle East and Asia would not be productive for Cyprus. A clear vision is required that must be coupled with a deep understanding of the coming inevitable changes and challenges to the shifting international climate.