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Foreign direct investment is high on Cyprus’s rebuild agenda

25 September 2020: All countries are counting the cost of the pandemic and trying to understand the role trade will play in recovery. For some, foreign direct investment is the answer. Cyprus is a case in point.

Attracting foreign companies to establish a local presence has long been a favourite method of growing an economy. Foreign direct investment (FDI) has certainly made its mark on the prosperity of many countries but it requires determined government action, the nurture of local talent, a strong culture of corporate governance and the building of a brilliant value proposition.

Pieris Markou, Tax and Legal Services Leader and incoming CEO at Deloitte Cyprus, reminds us that Cyprus is a small economy of under 1m inhabitants. This lack of scale enabled the Cypriot Government to take measures gradually and flexibly as the virus took hold.

“We even saw measures being taken in relation to specific industries,” Markou comments. “If we go back to March when the coronavirus measures were first announced, most of the economy was supported to some extent. The aim was to avoid mass redundancies.” 

Sadly, there was an expectation that Cyprus’s travel and tourism sector would perform better than proved to be the case. This has been well below the expected levels.

“Unfortunately, there was roughly an 80% reduction in tourism,” says Markou, “and that has forced the government to consider extending its support even further.” But indefinite support is not feasible and poor revenues from the tourism sector continue to be a worry. Part of the solution may be tourism offered differently going forward. For example, integrated casinos will be a feature of Cypriot tourism from next year and there is sure to be further innovation to come given that there is so much at stake: 4m tourists a year during good times.

The letting up of lockdown and the semblance of normality – at least for now – puts Cyprus in a more positive position than many countries grappling with new waves of pandemic. However, all nations are not equal, and Cyprus is building a recovery strategy that is tailored to its own specific circumstances and one that will also meet EU funding imperatives.

Let’s not forget that Cyprus has built its economy not only out of tourism but also professional service provision, as well as more traditional sectors such as construction. Looking forward, defining the sectors that will deliver sustainable economic growth following pandemic will be a priority.

FDI into Cyprus has slowed, both in terms of investors and projects, in recent years. “However, there is an ongoing necessity for existing investors to meet compliance requirements,” says Markou. “Our professional services industry is very much dependent on foreign investors who have already invested in Cyprus.”

Given that the Cypriot economy is so reliant on international investors, any significant tax reform is unlikely. “What the government wishes to avoid is making changes to the tax system that will impact on international investors. In fact, the government has been looking at incentives to make Cyprus a more attractive location for foreign investors but, at the same time, not impacting on tax revenues.”

He continues: “There may be some long-term reliefs we could make available. We may be able to do something to attract the funds industry to Cyprus. There may be a way of attracting companies to undertake R&D to develop intellectual property from Cyprus. Our efforts will be around attracting new entities with fully-fledged Cypriot offices and presence.”

For this type of intellectual property-based FDI to succeed, the Cypriot Government will have to choose the sectors with which it engages carefully. High technology and green technology for construction purposes are no-brainers – these are two sectors that are heavily patent-oriented. There are bound to be others.

Of course, the aim is employment of the local population by foreign companies on local soil as well as attracting top talent from abroad. However, for that to succeed, there has to be a highly educated local talent base in place that has the right skills to perform these newly created roles.

“The government is working on how we can make Cyprus attractive to foreign investors rather than on imposing taxes. The good thing is that the government has realised that if there are no revenues, even if you increase taxes, you are not going to collect. As you create revenues, you can keep your taxes low and collect more taxes,” says Markou. “Even during the Cypriot financial crisis, the government did not increase taxes for business. We want to avoid any surprises for our foreign investors.”

The upshot is that we can expect Cyprus to make a significant FDI push with the island marketed not just as a location for tourism and professional services but as a place where creative thinking will be supported and intellectual property developed then registered through the local patent process.

What about talent? Markou responds that this is a given; the nurturing of talent in Cyprus has long been a priority. “Cyprus was the first country that trained Chartered Accountants outside the UK,” he reminds us. “And 80-90% of our school-leavers go on to higher education. Many of them have overseas experience. We are an EU country that follows the UK common law system. And when a foreign company invests in Cyprus there is no question that there will be local highly educated talent.”