PROBLEM-SOLVING - How to resolve issues that are harming Cyprus’ Image as a financial center.
How to resolve issues that are harming Cyprus’ Image as a financial centre.
Even though Cyprus is one of the largest and most important centers in the financial services and IBC sector, it has started to lose ground vis-à-vis its competitors due to certain problems that have arisen over the years and need to be resolved. In recent years, this sector has faced great competition from both EU and non-EU member states, which have taken advantage of the crisis that hit the country in 2013 (the collapse of the economy), the problems facing our banks, allegations that the country is used as a tax haven, as well as our lack of action in taking significant steps and corrective actions, and are still trying to tarnish the good reputation that our small island has gained over the years and to direct investors and business opportunities to their own countries. We do not overlook action that has been taken to strengthen the sector for the purpose of attracting investors to Cyprus – on the contrary, we applaud it – including the timely introduction of tax incentives and legislation such as the amendment of tax advantages for relocating companies and changing their tax domicile (Non-Dom Status), the transfer of tax residence and the possibility of becoming a tax resident in 60 days, the amendment of the International Trusts Law, the introduction of Notional Interest Deduction (NID) enabling entities to deleverage and realise a tax-efficient return on new (qualifying) equity, the introduction of the Cyprus Tonnage Tax System (TTS), implementation of the latest changes within the Registrar of Companies, changes to the law on investment funds, incentives for new businesses and many more. Cyprus must continue to play a leading role as a financial centre and follow up on the actions taken for strengthening the services sector and increasing the number of international business companies. It is imperative to take immediate action and implement the structural changes outlined below in order to address problems that have accumulated over the years, which affect the services sector and make it difficult for international business companies to develop.
Problems that have accumulated over the years and measures
that need to be taken:
i. Outdated legislation, a great part of which dates back to the beginning of the last century and most of which is a copy of the legislation of other countries, which has been amended over the years.
There is a need to immediately modernize legislation in its entirety, following the example of England which has gradually reformed its corporate and investment laws.
ii. Bureaucracy in almost all public bodies is one of the major thorns in the government mechanism, causing dysfunction.
All services require improvement and upgrading to avoid bureaucracy, through legislative reforms, evaluation and training of government officers and reform of the public service.
iii. Timeframe for the relocation of companies in Cyprus.
Ways must be found to reduce the time needed and facilitating companies and groups wishing to be domiciled in Cyprus. For instance, it is imperative to set up a special department within the Ministry of Finance for handling these issues.
iv. Stabilization and modernization of the banking sector.
Frequent references to the problems that Cypriot banks are facing causes mistrust and worry on the part of investors. This, in turn, has the effect of disrupting the banking and financial services sector, which is inextricably linked to banks, services and the local tax environment, as well as to the operation of government departments. It is imperative to improve and upgrade all banking processes and to implement the directives of the Central Bank in order to attract companies and investments.
v. Strict framework for opening bank accounts and mass closure of bank accounts.
There should be a relaxation by the banks of their current strict rules to enable investors choosing Cyprus as a financial center to carry out their operations. Another priority is to reduce the time needed for opening bank accounts and to process remittances in a speedy manner in order to serve investors. We understand that new directives need to be complied with but, in many instances, actions are taken that discredit the country and make us vulnerable to our competitors. At the same time, our critics impose strict controls on Cyprus in their own countries, even though their banking system is very ‘loose’, causing massive problems for us. In 2013, when the EU imposed the worst punishment possible in the form of the haircut on deposits, most European banks were approaching business professionals to direct their clients to them.
vi. References to increases in taxes and levies, which create instability and uncertainty for investors, mainly for psychological reasons.
References to possible increases in taxation and levies should stop and tax and investment incentives should be provided in order to increase state revenues.
vii. Reinstatement/reduction of the tax rates and fees that applied before the haircut, in accordance with announcements by the government.
There should be a reinstatement/reduction of the tax rates that applied before the haircut, as per government announcements, and the elimination of the levy charged by the Registrar of Companies, which was imposed for the purpose of increasing revenue at the time of the crisis. The imposition of the levy was a copy of actions by offshore destinations, which failed to take into account that these destinations only imposed a levy on companies taxed at 0% and have no income from issuing company certificates.
viii. Imposition of a fine of 10% by the Tax Commissioner on money that was subject to the haircut in 2013, in view of the fact that it was not considered, under the applicable legislation, to constitute an expense of the business used for earning income and, as a result, is taxable.
A bill should be proposed whereby the 10% fine imposed by the tax commissioner on money subject to the haircut should be abolished. In addition, individuals who had chosen Cyprus to carry on their business and been punished by the haircut on their deposits should not be punished further.
ix. Amendment of the Companies Law which necessitates a number of changes in order to eliminate delays and unnecessary bureaucracy which has adverse effects. The ‘express’ registration of a company now takes 10- 20 days and the registration of changes to the shareholders and directors of a company takes up to 20 days. In competing countries, the time needed to register a company is around 2 days.
Staff should be hired and both the workplace and the archives kept by these departments upgraded.
x. Upgrading the workplace and the facilities/archives of public services (Civil Registry and Migration Department, Department of the Registrar of Companies, Income Tax).
New premises could be built in areas outside towns (between Nicosia and Limassol for providing service all over Cyprus) for storing huge archives so as not to create the phenomenon that we see today where every office has stacks of documents and there are delays in handling cases. Furthermore, this will save a great deal of public money which is currently used for renting spaces.
xi. Computerization of all government departments and development of e-government.
It is imperative that the public sector be fully computerized and e-governance developed.
xii. References to the personal liability of company directors before the tax authorities for company debts constitute a major blow to international activities carried out from Cyprus.
References to the liability of company directors should stop. If such liability is implemented, employees of Administrative Service Providers will be at risk of imprisonment.
xiii. Modernization of state structures.
There is an immediate need to restructure the state machinery through a targeted programme, which should not be used as a statement for political purposes.
xiv. Reduction of the response/approval time to immigration applications which, for the issuance of a simple residence permit, can take up to 6 months and up to 6 years for passport applications.
Recruitment of staff, distribution of tasks to each employee as well as the upgrading the working areas and the archives kept by these departments are essential.
xv. Failure to make full use of the Cyprus Stock Exchange(CSE).
Full use can be made of the CSE through a number of actions, such as the listing of large infrastructure development projects thereon.
xvi. Use of digital tools in Public Services.
The use of digital tools via publicly accessible websites, such as webcasts and voice or online chat for providing assistance and servicing the public, must be introduced.
xvii. Support for business and tax training.
Business and Tax Seminars should be held for people to keep them updated and compliant with new legislation (e.g. submission of tax returns). The posting of seminars on the webpages of the relevant governmental departments and the provision of guidance on compliance by government officers or through voice or online chat will help in this effort.
xviii. Effective one-stop-shop procedures from Invest Cyprus and/or other organisations.
An integrated Programme should be created for the encouragement and establishment of start-up companies, with incentives for new businesses and investments such as:
• Any new business engaging in activities in the field of research and innovation, will not have to pay corporation tax or defense tax for the next 5 or 10 years,
• No transfer fees will be imposed on the purchase of immovable property in special cases where the property is needed for business purposes
• Incentives are provided concerning the tax exemption of employees.
xix. More Double Tax Treaties and the setting up of a department to handle International Tax Matters.
We should remain constantly updated on international developments in this field by using trained and specialised staff to conclude Double Tax Treaties with as many countries as possible worldwide.
xx. Coordination among the district offices of various public departments.
It is often observed that the same department uses different practices in each town. It is imperative for district offices to cooperate with one another and to follow the same practice in matters relating to formal procedures.
xxi. Reducing the time needed for the issuance of certificates by public services (e.g. title deeds, certificates from the Registrar of Companies and the Tax Department)
A common line and unified instructions from department heads should be imposed in each department in order to prevent this from happening.
xxii. Answering phone calls made to the Public Service.
Unfortunately, one may call a public service for days without a reply. People should be hired to answer phones, record queries/questions from members of the public and coordinate answers, calling back if the competent officer cannot answer at that specific moment.
In order to strengthen the services sector, it is necessary to resolve all the above problems and take corrective measures. At the same time, dedicated departments should be set up in government ministries to promote and attract investment and international business companies, which will contribute to economic growth. In this regard, the following could be done:
A. Establishing a Council for Economic Development & Innovation, with the aim of encouraging and developing innovative ideas,
B. Promoting the establishment of cross-border provident funds so that foreign pension benefits received by non-tax Cyprus residents are taxed in Cyprus at a specified low rate, and
C. Setting up a special department or Deputy Ministry of Finance to handle issues related to incentives for attracting investments, international tax developments and the activities and initiatives taken by competing countries. It would be beneficial to incorporate Invest Cyprus to this entity, as the official body fostering the promotion of the investments in Cyprus, CIBA(Cyprus International Businesses Association), which is the official body representing the interests of international companies and taking care of the international business community in Cyprus, STEP (Society of Trust and Estate Practitioners),which is an international trust organisation, CIFA (Cyprus Investment Funds Association), which is an investment promotion organisation body, and other organisations such as the Cyprus Bar Association and ICPAC, so that it comprises recognized organisations and professionals whose aim is to develop and promote Cyprus as a financial centre.
It is imperative that we take the necessary steps to protect and promote the services sector and entrepreneurship and to attract foreign investment and international business companies, by providing better and more specialized services in both the public and the private sectors.
Article published to the magazines InBusiness and Gold as well to the local Newspapers on January 2020, by our Managing Partner Panikos Symeou.