Professional opinions regarding the Cyprus legal system in relation to competitiveness in economical and corporate area
An interview based research-article by ilarion Astreos, senior law student (LLB), at University of Wales.
“Professional opinions regarding the Cyprus legal system in relation to competitiveness in economical and corporate area - identification of problematic areas which render the current legislative framework as anti-competitive and deterrent for future investors.”
In this article we seek to investigate and identify areas within the professional spectrum of corporate law in Cyprus which are creating advantages and disadvantages in relation to competitiveness and attraction of new investors in relation to other countries. For the particular aim, we shall explain the reasons why Cyprus evolved to an International business center, how that situation was jeopardised by the recent events which led the economy to the verge of bankruptcy, and what areas in that sphere creates the necessity for modernization in order to overcome barriers which keep the economy in Cyprus hostage of its own myopic view.
Henceforth, we shall explain first of all the historical development of Cyprus up to nowadays, and we shall use professional opinions and answers in a line of targeted questions in order to identify where the real problems lay and what must be done in order to overcome them.
Historical background, and reasons of economic growth in Cyprus.
It is an undisputed fact that Cyprus, this small island which is located at the Mediterranean Sea has been for millenniums the “bone of contention” amongst the “Great Powers” that appeared in the world such as the Ottoman Empire, Franks, Venetians, Great Britain, etc. All of those powers by conquering Cyprus, tried to bring it under their sphere of influence and make use of it for their own purposes, either that were for military, trade, financial, or for a combination of those reasons most of the times.
One may ask why Cyprus has been such a desirable location for its numerous suitors, who even today are craving for a piece of the cake in this small island just as a starved person seeking food. Well, the answer lays first of all in the strategic location of Cyprus, which is of the Eastern Mediterranean area, at the main crossroads of three continents, Europe, Asia and Africa which are in fact amongst the busiest trade routes which are linking Western Europe with the Arab World which is extending to the Far East, providing a strong geopolitical and geo-economical power for those who control the island.
The above reason, inevitably turned the island into a major international and financial business center which expanded also to an offshore paradise base due to the fact that the steady political situation after 1974 created a gradual modernisation in shipping services, and services in general, including transit services for many companies who are dealing with the importation or exportation of goods. Furthermore, Cyprus implemented a favourable taxation system which in fact operated as a catalyst for international offshore corporate businesses to operate from Cyprus, especially after the accession of Cyprus in the European Union family in 2004.
However, it must be emphasized that Cyprus managed to maintain its competitive taxation system in relation to profits that offshore companies were earning and maintain its competitiveness as a business center even after the implementations of taxation conformity by the European Union in order to have uniformity with the OECD requirements. Specifically, Cyprus as an International Business Center managed to maintain the following few as a short example’:
- One of the lowest corporate tax rate in the European Union at 10%
- One of the lowest top statutory personal income tax rate at 30%
- Extensive double tax treaties network with over 40 countries, enabling lower withholding tax rates on dividend or other income received from the subsidiaries abroad.
- No withholding tax on dividend income received from subsidiary companies abroad under certain conditions.
- No withholding tax on dividends received from EU subsidiaries
- No withholding tax on capital gains and income on the disposal of neither the shares of the subsidiary's share capital nor the shares of the Cyprus holding company.
- No tax on capital gains or income on the liquidation of the Cyprus holding company.
- No withholding tax on distribution of profits
- Outward dividends by the Cyprus Holding Company to its non-resident shareholders are exempt from any withholding taxes.
- Profits earned from a permanent establishment abroad are fully exempt from Cypriot tax, subject to certain conditions.
- A diversified group of Cyprus companies belonging to a Cyprus holding company can set off Group relief for the utilization of tax losses.
- No minimum holding period.
However, the economical situation in Cyprus “met the fence” during the period of 2013 and our Mediterranean economical oasis turned into ruins and our soap-bubble burst revealing a pile of diachronical problems, mainly of economical and political bad handlings which led to the notorious “Cyprus Bailout” that became world known.
The particular “Bailout” produced a sequence of side effects which led to a mandatory “haircut” to deposits over 100.000 euro’s, to the shrinking of the banking sector which led of
f course to the decrease of foreign investors which under the fear of a non secure banking system fled the island, and of course worried potential investors who lost their interest. Cyprus Government sought financial aid by the mechanisms of the E.U in order to avoid the worst case scenario which was, bankruptcy, something which led to draconian measures in an effort to meet up our obligations towards our European counterparts and creditors, to control the hemorrhaging economy, and to rebuild the lost confidence once again to international markets.
Professional opinions and findings.
As in every situation, one must wait for the dust to settle in order to be able to assess better the scenery, and to reach to safer conclusions and new estimations regarding any future steps. We’ve sought out the professional opinion in a line of targeted questions from Mr. Chrysostomos DANOS, an active lawyer in Nicosia, who is dealing mainly in corporate law and investments in general, in order to investigate and identify which areas in Cyprus are anachronistic, and are forming obstacles to its competitive ability in comparison to other countries as follows:
1) In which aspects do you believe that the legal institutions in Cyprus need further modernization?
First of all, the deliverance of justice in Cyprus is very slow due to the lack of Judges. One must bear in mind that the population in Cyprus has increased especially the last decade and of course alongside with it as a natural side effect the economy expanded in many areas such as real-estate, banking, labour, corporate, etc. That of course, increased the work load for the Courts, due to increased petitions for adjudication before the Courts in all aspects, either in criminal law, family, traffic, etc. In addition, one must keep in mind that we Cypriots as culture we are litigious (Δικομανείς – Φιλόδικοι).
In relation to matters of corporate law and especially in the line of company’s registration before the Official Receiver and Company Registrar, an effort was made to ease up the procedure, by allowing the online registration of companies. However, even though such procedure saves precious time, yet the filing at the registrant must be made in person. That combination creates again a delay in relation to registry of companies in Cyprus. Furthermore, as a contributing factor to the particular delay is our banking system, which is moving slowly comparing to other countries, in areas of transferring funds or even providing guidance to its customers who wish to resolve a matter. For example, in the British Virgin Islands (BVI), the registration of a company, alongside with the relevant checks in the banking system takes maximum four days, while in Cyprus it can take up to a month.
In addition, one must keep in mind the slow procedure within the Governmental sector departments, especially in the departments of Land and Surveys, Inland Revenue Department, which reflects a bad image for Cyprus. Personally, i consider it as embarrassing, when my associates, or even foreign clients represented by my office, and who are residing permanently in Cyprus are complaining when they are calling continuously to the particular departments to obtain personal information’s, and nobody answers the telephone lines. This reflects a deficiency of professionalism which gives a bad name to Cyprus.
Furthermore, we are also facing delays within the migration department in relation to clearance permits and registration of foreign investors by third countries such as Russia and China, something which can be stressful for those who are waiting the particular papers to proceed and operate their business in Cyprus because without that clearance they are not able to have full access to public sector departments, such as registration to the revenue office for example, or to travel to other European Countries.
2) How does the economical crisis affect the Cyprus legal sector?
Due to the relevant crisis many current investors and most importantly future investors who were planning to invest in Cyprus are being sceptical and suspicious as to the future of Cyprus, which produced a decrease of companies registration and to decrease of particular by-products by such work turnover such as contracts, hiring services such as customs clearance, land rentals, etc. The damage that the relevant crisis brought to all work lines of the economy, affects us all collectively.
3) There are approximately 3000 registered lawyers in Cyprus, what do you think about this in perspective to the population? How do you explain the extensive interest of young people to choose the legal profession?ow jg
It is in fact a large number comparing to our population and it is my opinion that such phenomenon derives first of all by the prestigious status that the profession gained over the years, and not just in Cyprus. One also must bare in mind that unfortunately, many young people are forced to follow the particular studies due to family pressures for a secure working future, even though that is a utopia. If you don’t love what you’re doing then you are doomed to fail most of the times in all areas of life and not just the legal profession. However, by obtaining a legal degree, one may use it for many areas or work, such as the public sector, the Police, etc. The only sure thing is that a degree of legal studies, open doors and provides a wide range of applicability in many areas of the employment market.
4) Are female lawyers as respected in the field as male lawyers?
Let me assure you that in Cyprus the feeling of equality has high standards we as lawyers we do not separate ourselves into man and women. There are only lawyers who are treated equally by the Courts and society, not based on their gender but based on their abilities. However, in terms of society regarding the selection of a representative lawyer, one might notice that a certain portion of people choose to be represented by a male colleague, something which derives by our own society who regarded men as better than women, something which was happening in the period of 1950. The particular view however, is very rare.
5) How can the shown tendency of Cyprus lawyers to work mostly with corporate law and offshore business affect other areas of practice?
Well, the particular area provides a lucrative field with opportunities for further collaborations abroad. Don’t forget that there was a time when the demand for corporate lawyers had been high due to the number of foreign investors and the need for companies registration and legal representation of those companies as legal entities. Henceforth, that attracted many colleagues in the particular domain.
6) What characterizes in our days, in your opinion, a good lawyer?
As in every profession, the criteria for a successful and respectful course in matters of professionalism are the same. Is the ability to adapt to new circumstances either by continuous education or briefing in respect to your profession and domain , to be organised and hard working, to be honest and above all, to love what you are doing.
7) What must be done to strengthen Cyprus role as an international business center?
It is my opinion that the quota of the amount needed for someone to obtain the Citizenship must be reduced, and we must offer more economical motives to foreign investors. As a tourist destination island, we are still without a vision regarding the attraction of tourists and furthermore to expand to the attraction of foreign companies which are dealing with the tourist industry. For example, we are in fact amongst the more expensive countries in the E.U, and we are still facing hits of profiteering against tourists. Moreover, we are being antagonised by the areas which are not under the effective control of the Cyprus Republic (occupied Cyprus) were the prices in general are cheaper, and especially on tobacco products and alcoholic beverages. I would like to emphasise the phenomenon of profiteering, because literally is destroying our good name as honest and hospitable persons and culture.
In addition, I’m felling disappointed by this image, for the reason that even though we are surrounded by sea, we still have water shortage within the summer period, something which is unacceptable. The need for desalination units is more than eminent, and this can also be a good opportunity for future investment.
Furthermore, we must give emphasis and provide enlightenment concerning the benefits for investment on natural gas, which can be used also as an additional motive for investments in the area of providing services, such as the attraction of further companies who will be dealing for example in electricity services powered by natural gas, or even companies who will provide services regarding the distribution of gas for housing heating, car fuelling as the particular legislative proposal for such modification on vehicles, or even the distribution of the gas within the island with underline pipes in order to be used in industries. The areas for further strengthening are limitless.
8) How can potential investors’ confidence in Cyprus develop?
As we’ve mentioned in question one, the matter is touching all the aspects of professionals in Cyprus but mainly the Public and Banking Sector. It is important for the Public sector to meet up the efficiency of modern era and upgrade to a functional organisation with modern technology and capable people who will eliminate the time consuming pushing of papers and the ping-pong effect from one office to another. In addition, our banking system must be regulated in order to provide specific services to professionals that will facilitate the needs of a professional by saving time.
Last but not least, the state must modernise the Judicial Authorities by hiring more Judges in order the reduce the backlog of cases before the Court to be, offering a fast track delivery of Justice, especially in cases of contracts which evolve most of the times claims by corporate organisations. A good idea is the formation of specialised tribunals which will handle, let’s say, claims for small amounts up to 5.000 euro’s with clear contractual disagreements which are easy to be handled within a couple of appearances, in order to clear the field for more serious and complicated cases before the Court.
All of these small things will help to improve our good image abroad by illustrating professionalism at a high standard in Cyprus.
9) What are the opportunities in Cyprus in times of recession?
Now it is a good opportunity for a physical or legal entity to invest in real-estate. Now the prices have deflated and are illustrating their natural price, with good opportunities for “bargains” let’s say. However, as we mentioned earlier this creates again an oxymoron. Even though, the time is favourable for such investments, the bureaucracy in Cyprus within the Land and Revenue departments is producing a negative factor with defaming consequences abroad.
Furthermore, due to lack of efficient legal framework in the legislation concerning the issuance of real estate titles for the purchase of land in general, including housing of course, has created a bad name for Cyprus especially in the U.K, where buyers find themselves stranded and disappointed by such purchases, and with combination to our slow delivery of Justice such cases of rebutting such contracts, or any other claims regarding misrepresentations, and not honouring contract agreements, are creating again an endless time consuming circle. In addition, we include the restrictions and the rigidness by the bonking institutes to offer loans even if their terms are met in relation to payoff.
10)What were the biggest challenges you faced during your career, and how have you overcome them?
Well, the challenges have been explained in the given answers so far, such as bureaucracy in the public sector, banking system, etc. As to the overcoming of such challenges, we use the law either to complain to the proper departments. In most of the cases, patience has its role. However, we are ready to sough for our clients rights before the Court if our good faith is manipulated.
11)What does your firm look for when hiring?
This is divided in two categories in my personal opinion. The academic criteria of each candidate, and the personal criteria concerning his/her character. In terms of academic criteria surely the candidate with high grade on his legal degree has the advantage. However, the character of the candidate or even the trainee that will be hired has the primary role most of the times. As an office we like people who are hard working, social, intelligent, with concern, polite and not hot-tempered.
One must keep in mind that a law firm, most of the times is dealing with physical persons, and the need for understanding and respect is vital. Personally, I’m more willing to forgive a trainee for a mistake or mistakes in the line of work because mistakes happen as natural, rather to forgive a person who will treat a client or any other person in the line of work with disrespect or irony.
12)Do you accept any case that comes in or do you have certain criteria’s choosing your cases?
My office provides legal services and advice. In that perspective we are willing to hear out each case and provide the best solution for the interest of the client under the particular circumstances. However, a line is drawn when the circumstances indicates any form of illegality by the client.
13)After many years of experience, practicing the legal profession do you believe that justice reveals the most times in court?
Justice in Cyprus has good reputation and that is not random. Any Court ruling provides not only the enforcement of legislation, but is also setting the ground for future claims. Henceforth, when a ruling is made, and then published, is offering the legal or moral compensation for the claimant in the most formal way. In that perspective, i do believe that justice is revealing most of the times within the Court room.
14)If you had the opportunity to change something in your life, what, if anything, would you do differently? If you had a completely free choice, which law would you like to change and why?
Any legislation is drafted according to the needs of the domestic society according to its sensitivities. Law, is not something rigid. One must bear in mind for example that homosexuality was illegal in Cyprus few years ago, and now the parliament is discussing about the legal framework regarding the equal treatment of homosexual couples in relation to heterosexual.
Since the need for modernisation is eminent i would like to see in Cyprus a Judge Academy, which will prepare and give the essentials to lawyers that wish to follow the particular path in the future, something which is established in Greece and provides specialisation in certain areas of adjudication such as in the corporate and financial area. I would like the modernisation of the registrar in Court so the personal appearances in certain areas to be able to be handled through the internet.
15) What is your advice for any individual who wish to invest in Cyprus?
First of all is to apply to a specialist, either that is a lawyer, accountant, or a financial expert in order to explore his options, and not proceed to any high risk investment without proper consultation. The danger, of becoming a subject of fraud by exploiters is a factor that must be taken into serious consideration. In addition, is better in cases that he wish to take advice by more than one expert on the matter is to find himself an independent advisor and not be directed by his first professional to persons that he is associated in order to avoid the possibility of collusion.
As we have seen within the content of this article, the situation in Cyprus has room for improvement by targeted changes. Cyprus, has still the opportunity of becoming once again the financial oasis that we all know, as long as we work collectively for such purpose.
Furthermore, Cyprus has the particular quality in professional manpower, and has nothing to fear by any other Country. Surely we have our disadvantages, but the area for improvement is fertile.
Chrysostomos DANOS is an active lawyer in Nicosia/Cyprus, member of the Cyprus Bar Association and a partner at DANOS law firm.