Last week, Cyprus government and Troika agreed in principle on an MOU on Specific Economic Policy Conditionality. The MOU contains several provisions and measures relating to:
- The Financial and Banking Sector;
- Fiscal Policy;
- Fiscal and Structural Measures;
- Labour Market;
- Goods and Services Markets;
Beside the austerity measures which are costly in terms of growth, at least in the short term, many of the policies proposed are generally and widely supported by many in Cyprus. The fact that austerity is undertaken simultaneously with bank de-leveraging is indeed going to weight a lot to the growth prospects in Cyprus, at least for the next 3 years to follow. However, there is a balancing effect which is fully in line with the fact that Cyprus is an international business centre. Our fast and hard observations regarding the international position of Cyprus post MOU are the following:
- None of the tax advantages of Cyprus tax system are under policy consideration in accordance to the MOU. More specifically all the tax policies target primarily local tax payers. The only deviation to that principle is probably the abolition of exceptions for the payment of Euro350 annual levy. These exceptions however were not particularly used by international investors using Cyprus for international business purposes.
- The reputation and safe status of the Banking sector is re-instated following the MOU.
- The institutions will receive a full third-party appraisal by 1/3/2013 and will be recapitalised fully with an agreed Euro 10 billion recapitalisation loan;
- The non-performing assets of the banks shall be bought by a government led Asset Management Company (AMC);
- The enlargement of the financial sector is achieved. The inclusion of Cooperative Credit Institutions under the umbrella of Central Bank of Cyprus changes the financial sector in Cyprus considerably. International business was for many years out of reach for such institutions but it seems that now the new regulatory regime will change that dynamic towards a more extrovert approach.
- The agreed modernisation of the regulative regime relating to Public Private Partnerships (PPP) together with the privatisation of state-owned enterprises (SOE) will create new opportunities for international investment for large projects.
- The restructuring of Professions and Services sector will further open up the market for new international investments in these sectors.
- The necessary restructuring of the Public Sector will create a trend of abolishing red tape in the public sector creating efficiencies which will certainly benefit fast track licensing, registration and approval of actions related to international investment and routing.
It was always our expectation that even though Cyprus is cash strained, austerity and taxes would be of such nature that will safeguard the position of Cyprus as an international business centre. The fact is that in the last one-year amendments to Cyprus Tax enhanced Cyprus position in international scene by lowering taxes for international investors. The new royalties tax regime, the new yacht leasing scheme, the new investment immigration regime and the new trust law regime, are only few of the such recent amendments. Together with the non-abolition of traditional tax benefits of Cyprus (i.e. the lowest tax rate in Europe), the support of Euro10billion towards Cyprus troubled banks and the enlargement of the financial sector we strongly maintain that Cyprus is back in business.