Sun, fees and sand

Cyprus is already a hit with holidaymakers, but its favourable tax regime is also attracting foreign investment to the island, says Kit Chellel

Set in the crystal waters of the Mediterranean, Cyprus is better known for its beaches and citrus groves than its law firms. But look beyond the hordes of sun-burnt Brits and you will find a thriving financial centre, serviced by a competitive legal community.

At 10 per cent, Cyprus has one of the lowest corporate tax rates in the EU and the island is positioning itself as a centre for investment in the region. In 2008, despite the crisis engulfing the global financial ­system, more than 24,000 companies ­registered in Cyprus, only a slight drop on the figure from the previous year.

“The tax regime is one of the most favourable in Europe,” says Michalis ­Kyriakides, a partner at Cypriot firm Harris Kyriakides. “It generates work for lawyers, as well as for banks, investment firms and trusts.”

It is a world you would never know ­existed, judging by the drunken tourists who party in Agia Napa throughout the summer months. But it is one that is vital to the future of Cyprus as it tries to find its place in the global market.

Recently, the welcoming tax regime has proved particularly attractive to Russian companies and investors. Several Russian finance houses have set up shop on the island, including Renaissance Capital and Metropol, and large Russian companies often register holding companies there.

Cyprus’s largest firm, Andreas Neocleous & Co, has offices in Moscow and in the Ukraine, reflecting the importance of this relationship. Head of corporate Elias ­Neocleous points to cultural synergies, such as the shared ties to the Orthodox Church.

“There has traditionally been an historic link between Cyprus and Russia because of religion. Many Cypriots also used to study in the Soviet Union,” he reveals.

But the main driver behind the upsurge in Russian interest has less to do with culture and more to do with cold, hard cash. ­Earlier this year, Cyprus and Russia signed an agreement that removed Cyprus from ­Russia’s tax “black list”; Cyprus’s entry to the euro last year also boosted its appeal.

Added to this is the fact that the Cypriot banks enjoy a reputation for stability and the presence of numerous UK-qualified finance professionals. Kyriakides, for example, ­studied at the University of Oxford and ­University College London. He recently worked on a multimillion-euro deal for a well-known Russian energy company that has a holding company registered in Cyprus.

However, the relationship has inevitably been hit by the faltering Russian economy. Neocleous says that at its peak, Russian deal flow accounted for around 10 per cent of firm revenue. Now that is more like 5 per cent.

“Russia is going through a very difficult time,” he says. “Corruption is an issue and rule of law is an issue.”

While the flow of cash from Russia might have stalled, Cyprus is working hard to attract finance from emerging economies: Dubai, Singapore, China, even Libya. The Libyan minister for justice was in the ­country in May this year to talk about new agreements on oil and natural gas supplies.

Of the 20 or so decent-sized law firms in Cyprus, only a handful have the capacity to make the most of the country’s growing ­reputation as a finance hub.
“Not many firms have the capacity to do international deals,” notes Kyriakides.

Andreas Neocleous & Co is the largest, with some 80 lawyers – double the size of its nearest rival. The firm has set out its stall as the adviser-of-choice on international deals that reach into Cyprus and it fosters close relationships with UK magic circle firms.

“Our strategy has been to make sure that if there’s a big deal happening in Cyprus, we’re involved,” says Neocleous.

Big instructions last year include acting for Société Générale on Cypriot aspects of the $384m (£234.56m) credit facility ­provided to Russia’s Brunswick Rail,
and working alongside CMS Cameron ­McKenna for MDM Holdings on its redomiciliation from Austria to Cyprus.

The firm’s core practices have been hit hard by the recession – “M&A has dried up, IPOs have dried up, LBOs have dried up,” admits Neocleous – but it is still growing at a rate of around 20 per cent a year.

Harris Kyriakides has also continued to expand despite the credit crunch. Kyriakides says the firm’s turnover grew 10 per cent during the past financial year, adding: “Financial services hasn’t been hit in the sense of volume of work. Now we have ­different work to do. Two years ago everyone was buying and selling. Now everyone’s ­liquidating and restructuring.”

And, although the construction industry has been badly affected, there are still ­projects for large firms to act on. Harris Kyriakides has worked alongside Norton Rose on the redevelopment of Larnaka International Airport, for example.

The firm likes to keep its international work separate from its local clients and has a dedicated international department. Given the success of local firms and increasing number of international deals, it is ­perhaps surprising that not one foreign firm has even a representative office on the island. Some local lawyers are baffled, ­considering the number of international firms in neighbouring Greece. “For some reason, big firms just haven’t expressed an interest in coming here,” says Kyriakides.

One reason might be the perception of political instability, given the division between the Greek and Turkish parts of Cyprus (see page 26). It is more likely that the local market is simply too small to ­warrant a full-time presence. Cyprus has a population of around a million and outside of financial services, the main industries are construction and tourism.

But international firms working in Russia and the Middle East in particular would do well to note the progress of Cyprus as a financial destination in its own right. Or, like the lobster-coloured tourists lazing on the golden beaches, they risk overlooking the true face this enigmatic island.