International focus: A Cypriot sea-change

A raft of new legislation that frees up investment opportunities while clamping down on corruption could be the tonic the country needs.

Q: How important is it that Cyprus completes the privatisations it has planned, and why has the process been so slow?

Pavlos Aristodemou, partner, HarneysPrivatisation has been the matter of a debate in Cyprus since a substantial part of the population believes that privatising key state companies will not necessarily bring the benefits that the government wishes to see.

The bailout agreement imposes privatisations, however the agreement will most likely come to an end much sooner than anticipated since the Cypriot economy is exiting out of recession. The government has been and still is very keen in privatising the state companies notwithstanding the early termination of the bailout agreement. Labour issues have slowed down the process, but the benefits of foreign investment, private sector management and healthier competition are a few of the benefits we can expect from the completion of privatisations.

Cyprus

Elias Neocleous, head of corporate and commercial, Andreas Neocleous & Co: The privatisation issue goes deeper than mere fundraising, and that is probably the main reason that progress has been much slower than the “troika” (the European Commission, the European Central Bank and the World Bank) wanted.

The lenders believe that privatisation of the semi-government agencies, such as the Cyprus Telecommunications Authority and the Electricity Authority will put a stop to the nepotism, inefficiency, even corruption they think is widespread within them. Critics of privatisation, principally the unions but also a sizeable part of the general public, see privatisation as part of a neo-liberal agenda that is being imposed for reasons of dogma.

The troika has made progress on privatisations a condition for the successful completion of the current review and the release of the next tranche of the bailout loan, so it is obviously important in that sense. However, it is widely expected that the current review will be the last, and that Cyprus will exit from the programme early in 2016. The privatisation process will be by no means complete, or even irreversible by then.

My personal view is that abandoning the privatisation process would send the wrong message to potential investors and trading partners, that Cyprus is not serious about eliminating nepotism and inefficiency. However, privatisation is a means to an end, namely the promotion of openness, meritocracy and efficiency, and if these can be achieved by some other means I do not see any reason to be dogmatic.

Michalis Kyriakides, partner, Harris Kyriakides: I think that the slow pace of privatisation is mainly attributed to three reasons: first, the economy is doing better than projected and the necessity to streamline privatisation has ceased to be pressing, although this does not in any way mean that they should be postponed or abandoned; second, there has been opposition from some stakeholders, such as employees and, therefore, it is not a smooth ride; and third, we need to acknowledge that Cyprus does not have experience in privatisation and such lack of experience makes the process slower.

Having said that, my belief is that privatisations are necessary and should be pursued: they will increase market competition, rectify market distortions, and facilitate the development of better infrastructure in Cyprus.

Q: How significant is the new law on debt securitisation, and what difference will it make to Cyprus’s financial services market?

Aristodemou: The main problem that the Cypriot economy faced in recent years was the disproportionately big size of the banking sector in relation to the country’s GDP. The failure of the banking system led to the imposition of a bailout programme imposed by the international lenders.

The banks have successfully recapitalised themselves, yet the main issue they faced was the number of non-performing loans (NPL) they had to deal with. The banks had a hard time dealing with securitisation and sale of NPL portfolios because the activity was restricted and cumbersome. Recent changes in the law give banks the opportunity to proceed with securitisation of non-performing loans and make them available to investors.

Should the banks succeed in selling such portfolios their balance sheet will look much better, and lending into the real economy will be made possible to a larger extent. The legislation, therefore, could be seen as a valuable tool contributing to a healthier banking system and a more solid economy.

Neocleous: The amount of non-performing debt in the banking system is one of the most serious obstacles to economic recovery, as it deprives banks of the liquidity they need in order to finance new business.

Banks were prohibited from selling loan portfolios to any entity other than licensed Cyprus credit institutions, and with all domestic banks more or less in the same boat there were no buyers for distressed debt. The new law, passed in mid-November, allows loan portfolios to be sold to companies registered in Cyprus and to subsidiaries of credit institutions in other EU member states. It has not been formally published and some details are sketchy, owing to the fact that the draft law underwent a number of amendments during the course of parliamentary discussion. However, it should allow banks to draw a line under the NPL problem.

With about €25bn of non-performing debt in the system there is potentially a lot of business to be done. Further, strategically non-performing debtors may well find that the prospect of their debt being sold to a foreign investor who is not constrained by any perceived cultural norms is a powerful incentive to resume repayments.

Kyriakides: Undoubtedly, Cyprus needed to improve its insolvency framework and, in my opinion, the new framework is better than the previous framework. The Insolvency Service has also been strengthened and this may play its own pivotal role in the implementation and further development of this framework. As for the impact on the financial services market, I believe that the shift in the principles underpinning this framework, which remarkably move the barrier in favour of debtors rather than creditors, will result in more cautious lending in the future.

Elias Neocleous
Elias Neocleous

 “The amount of non-performing debt in the banking system is one of the most serious obstacles to recovery” – Elias Neocleous

Q: What have the other most significant legislative developments been since Cyprus’s bailout? Does the government still need to make legislative changes?

Aristodemou: The amendment of Cyprus Companies Law to introduce protection for companies is a rather important legislative development. Companies are now able to seek protection by filing with the court requesting examinership. This is a similar concept to the one in Ireland and the US (chapter 11).

Further, an important development is the signing and ratification of a double tax treaty between Cyprus and Iran. It is expected that Cyprus would be one of the jurisdictions investors may use for investing in Iran (noting that the international sanctions imposed to Iran will come to an end in 2016).

Additionally, in 2014 Cyprus overhauled its regime regulating alternative investment funds to bring it fully up to speed and in line with the requirements and opportunities presented by the EU Alternative Investment Fund Manager’s Directive (AIFMD) in the form of the Alternative Investment Funds Law, 2014.

Neocleous: A number of changes to the tax system were made in July this year aimed at encouraging investment and stimulating economic activity. These included the introduction of a notional interest deduction on new equity capital introduced into companies in order to finance income-generating assets, the introduction of a “non-domiciled” regime, exempting people who are not domiciled in Cyprus from certain taxes, and a temporary exemption from capital gains tax for immovable property acquired between 17 July 2015 and the end of 2016. There are further changes planned, including exemptions from income tax available to new residents of Cyprus.

The implementation of the AIFM and related legislation gives Cyprus a sound base to develop a funds industry, albeit somewhat late in the day. The continued expansion of the double tax treaty network, which now covers 56 countries, is also a positive feature. A new law on foundations, aimed at meeting the needs of investors from civil law jurisdictions, who are unfamiliar with the concept of trusts, is in the pipeline.

“What’s important now is making sure investors find it easy to do business in Cyprus” – Pavlos Aristodemou

By and large we have the legal framework in place. What is important now is making sure that investors find it easy to do business in Cyprus. This will require unnecessary bureaucracy and red tape and delays in the court system to be eliminated, and the fostering of a “can-do” attitude in government departments.

Kyriakides: I think that perhaps the most important piece of legislation in 2015 is the law which allows for the swift examination and issuance of title deeds to buyers of immovable property
in Cyprus, notwithstanding problems that may exist on the part of the seller, such as mortgages or house and planning discrepancies. The relevant law was enacted on 4 September 2015 and introduced relevant amendments to the Transfer and Mortgage of Properties Law No. 9/1965. In particular, articles were added regulating the conditions that would allow for the transfer of Cyprus real estate ownership in the name of the buyer and the relevant procedure that needs to be followed in this respect.

Q: How healthy is the Cyprus legal market at present?

Aristodemou: The Cyprus legal market was driven by Russian related structures and businesses. The international sanctions imposed on Russia and Russian legislation on de-offshorisation has affected the legal market to a certain extent but not as much as one would have thought. Privatisation projects, restructurings, funds related matters and shipping related deals have kept the legal market healthy.

It should also be noted that international commercial litigation is still doing very well since Cyprus serves as the venue for resolving legal disputes or as the venue where parties seek to take protection and assistance in matters with an international element where Cypriot parties are involved.

“Privatisations should be pursued: they increase market competition, rectify market distortions and facilitate the development of better infrastructure” – Michalis Kyriakides

Neocleous: I hope that the events of the past few years will ultimately prove beneficial. In the seller’s market that prevailed for 20-odd years prior to 2011 it was easy for law firms to survive, and indeed to thrive, despite offering a bad service. That is no longer the case. Clients have a choice, and they will not tolerate poor service and excessive fees.

There has already been a good deal of consolidation in the legal market, and I expect this to continue. In addition, the tightening of regulation, partly at the behest of the troika, has eliminated some of the less reputable service providers.

Kyriakides: I think the Cyprus legal market is quite healthy. There are well-established firms that can support local and international transactions at a professional level and reasonably priced. Compliance and regulation is also improving.