By Elias Hazou
The Cyprus Investment Promotion Agency (CIPA) is urging parliament to expedite a batch of bills aimed at facilitating much-needed foreign investment in Cyprus.
Chief among the proposals are the establishment of foreign leasing companies and cell companies, opening up the professional provident fund business to foreign concerns, and updating company law.
On the latter, CIPA recommends that Cyprus enact a local version of the US’ Chapter 11 bankruptcy. Under the proposal, companies would be afforded protection from minor creditors owed money and seeking liquidation.
According to a March 19 letter by CIPA to the House commerce committee, and seen by the Cyprus Mail, this would also protect corporations from “potentially malicious applications by minor creditors, which could lead companies to closure, even if the reason for non-payment is a temporary and manageable lack of liquidity.”
“It would stop creditors from seeking to wind down a company for, say a mere €500,” director of CIPA Christodoulos Angastiniotis said.
The draft legislation has been tabled to parliament.
A pending bill, drafted by CIPA itself, sees the creation of cell companies in Cyprus. Its objective is to attract foreign investment, particularly in the insurance business.
A cell company, also known as a segregated portfolio company (SPC), is a corporation which segregates the assets and liabilities of different classes of shares from each other and from the general assets of the SPC.
An SPC is technically a single legal entity and the segregated portfolios within the SPC will not be separate legal entities which are separate from the SPC, although for bankruptcy purposes they are treated as such.
CIPA also proposes the establishment of leasing companies. A typical leasing company is one which is set up for the ownership of assets (for example airplanes) which it leases to affiliated customers.
Foreign leasing companies qualify for a low tax rate for profits derived from their activities.
The agency has further recommended amending the law to allow professional provident funds from non-EU countries to incorporate and operate in Cyprus. However this proposal was left out of a law governing provident funds recently passed by parliament.
Whereas these are sound ideas, far more is needed to attract foreign direct investment, said economist Theodore Panayotou, when asked to comment.
“Our key problem is the ease of doing business, primarily because of the red tape,” said Panayotou, who heads the Cyprus International Institute of Management (CIIM).
He reiterated the need for a one-stop-shop in Cyprus. While all pay lip service to it, the matter has been bouncing between inter-ministerial committees for years.
The hold up, said Panayotou, seems to be due to various government departments being reluctant to relinquish administration to a central agency for fear of losing control.
“Foreign businesspeople don’t want to deal with cumbersome bureaucracy. How much more inclined would they be to set up shop here if it could be done with a click of the mouse?
“It takes dozens of procedures to set up a photovoltaic system in your home… that gives you a clue of how slowly things work,” he added.
According to the economist, low corporate tax and high interest rates on deposits are all well and good, but not enough.
“This was our past model, attracting offshore companies who parked their deposits in our banks. It created an artificial impression of wealth, which turned out to be a bubble. By contrast, real investment is where foreigners commit capital.”
The island does present investment opportunities, said Panayotou, citing plans for a casino and the intended privatisation of telecoms and electricity.
What Cyprus must do is revamp its image, re-establishing itself as a reliable business destination. A step in the right direction was the recent passage of the insolvency framework and the coming into force of effective foreclosures legislation.
“The message that you have to honour your debts with the banks also has wider reverberations for foreign entrepreneurs potentially interested in Cyprus,” said Panayotou.
According to the 2014 World Bank report on ease of doing business, Cyprus ranked 39th out of 189 countries (lower score is better). On the ease of starting a business, the island ranked 44th; dealing with construction permits 86th; resolving insolvency 24th; registering property 103; and getting electricity 108th.