Cyprus has an open free-market economy based mainly on the services sector with some light manufacturing.
Cyprus’ accession to the European Union as of 1st May 2004 has been an important milestone in the country’s history. As a full member of the EU, Cyprus has adjusted its legislation in conformity with the requirements of the European Union. Conditions for business activities in Cyprus meet high standards demanded from the EU members. At the same time, terms and conditions for free enterprise offered by Cyprus – among which one can name, first of all, a favorable business environment, access to international business infrastructure, regional and global communication lines, as well as investment and commercial opportunities – still (if not more than before) provide a solid basis for successful international business, as well as for different foreign investors’ activities.
In the past 25 years Cyprus economy has shifted from agriculture to light manufacturing and services as its main sectors in our days. Service sector, including tourism, contributes 76% to the GDP. Industry and construction contribute 20% GDP. In 2005 manufactured goods accounted for approximately 57 % of national export. In 2005 agricultural goods made 43 % of the total national export Potatoes, citrus crops, wines, meat and dairy products are the principal export items.
Export of manufactured goods includes pharmaceuticals and medical supplies, furniture, electrical equipment, cement, clothes and knitwear. Re-export operations play an important role in Cyprus’ export-import activities. In 2005 the total volume of re-export operations attained CYP 465 mn. that is more than USD 1 bn.
Factors fostering Cyprus as an International Business Centre in Eastern Mediterranean
At all times the geographic location of the island has contributed to its being a hub on the cross-roads of trade and traffic routes in the Eastern Mediterranean. Nowadays geographical factor is even intensified by excellent airline and sea connections, modern transportation and logistic infrastructures, and the most advanced telecommunications linking Cyprus with the rest of the world. Due to these facts Cyprus is able not only to serve still as a bridge between West and East, but also to open new opportunities for business contacts between nations provided by contemporary civilization.In addition, Cyprus has a well-developed system of financial institutions and offers professional business services – legal, auditing, consulting, etc. Besides, Cyprus has a sound legal system – legislation, court, regulatory framework. A high-class education system provides the country with a qualified labor force of different levels - from workers to experts. Taking into account still relatively low operating costs in the island makes Cyprus a very attractive place for doing business. A low crime rate is also worth mentioning. Traditional Cypriot hospitality is also an important factor for foreign business.
The existing tax system, as well as modern transportation, housing, communications also add to treating Cyprus as a natural hub for companies doing business in the Middle East, Eastern Europe, the Russian Federation, and North Africa. These factors enable Cyprus to perform as a regional hub attracting international business companies doing their business out of the bounds of the island.
Cyprus’ accession to the EU has offered new opportunities to Russian entrepreneurs. As a result of the recent changes in Cyprus law, International Business Companies (IBC’s) are allowed to operate freely in Cyprus except for some sectors of national economy where special permit from Cyprus authorities is needed. In case an IBC chooses Cyprus for doing its business, it will get an advantage of a direct access to the markets of Middle East and Africa with total population attaining 350 mn. Inhabitants.
Investment Climate
Cyprus Government pursues a consistent policy aimed at improving the investment climate in the country. Since 1st October 2004 Cyprus Government has lifted restrictions on foreign direct investment (FDI) from non-EU countries with a view to attract more FDI to the island to promote Cyprus as an international business centre.The earlier decision of the government to lift incoming direct investment restrictions for EU residents as of January 2000 boosted foreign investment from the EU, which sprung up from USD 225.2 mn. In 1999 to USD 374.7 mn. in 2000. The total inflow of FDI from all countries reached USD 1 bn. In 2003, 58.1 % of which came from the EU. In 2004 ã. the FDI inflow in Cyprus economy attained € 869 mn. and the share of EU-members increased up to 66 %.
Cyprus has bilateral agreements for the encouragement and reciprocal protection of investments with 20 countries, including Armenia, Belgium, Bulgaria, Belarus, China, Egypt, Greece, Hungary, India, Israel, Italy, Lebanon, Libya, Malta, Poland, Romania, San Marino, Serbia and Montenegro and Seychelles. Another 40 agreements for the avoidance of double taxation, including that one with Russia, are also currently under effect.
In July 2002, the House of Representatives (the top legislative authority in Cyprus) passed tax reform legislation (in force as of 1st January 2003) abolishing tax discrimination afforded to offshore companies, in line with Cyprus’ commitments to the EU and OECD. Under the existing law, corporate tax on profits for IBCs and for local companies is equal and is set at 10 % - this is the lowest rate in the EU. This enables taxpayers, which have business in Cyprus, to apply the minimal rate to taxes levied.