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Doing Business in Cyprus: 2010 Country Commercial Guide for U.S. Companies INTE

Doing Business in Cyprus: 2010 Country Commercial Guide for U.S. Companies INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2010. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.  Chapter 1: Doing Business In …  Chapter 2: Political and Economic Environment  Chapter 3: Selling U.S. Products and Services  Chapter 4: Leading Sectors for U.S. Export and Investment  Chapter 5: Trade Regulations and Standards  Chapter 6: Investment Climate  Chapter 7: Trade and Project Financing  Chapter 8: Business Travel  Chapter 9: Contacts, Market Research and Trade Events  Chapter 10: Guide to Our Services Return to table of contents Chapter 1: Doing Business in Cyprus  Market Overview  Market Challenges  Market Opportunities  Market Entry Strategy Market Overview Return to top Government-Controlled Area1: The government-controlled area of Cyprus offers good business and financial services, modern telecommunications, an educated labor force, good airline connections, a sound legal system, and a low crime rate. Cyprus’s EU membership, its geographical location, low tax rates, and modern infrastructure make it a natural hub for companies looking to do business within the EU and with the Middle East, Eastern Europe, the former Soviet Union and North Africa. A liberal investment regime has also helped increase the flow of direct investment in Cyprus in recent years. The inflow of total direct investment in Cyprus in 2008 (including “brass plate” companies) reached USD 4.0 billion in 2008. Intellectual property is protected under modern copyright and patent legislation, although better enforcement of these laws is needed. In 2009 growth in Cyprus declined as the effects of the global crisis hit Cyprus. It is estimated provisionally that the economy contracted by about1.5% in 2009, compared to positive growth of 3.8 percent in 2008. The outlook for 2010 remains weak, with a growth forecast of 0.5 percent. Public finances also recorded a sharp deterioration in 2009, deviating considerably from the government’s predictions at mid-year. The government’s hopes of containing the deficit below 3.0%, and thus avoid supervision from Brussels have been dashed, as 2009 closed with the deficit running at 6.1%, from a surplus of 0.9% in 2008. The outlook for the deficit in 2010 and beyond depends on the outcome of the government’s current efforts to contain spending and boost revenue. Total public debt grew from 48.4% of GDP in 2008, to 55.2% in 2009, and is poised to reach 60% in 2010. In the last couple of years (2007 and 2008) economic growth has 1 Since 1974, the southern part of Cyprus has been under the control of the Government of the Republic of Cyprus, while the northern part has been administered by a Turkish Cypriot administration, which proclaimed itself the “Turkish Republic of Northern Cyprus” (“TRNC”) and has not been recognized by any country except for Turkey. A substantial number of Turkish troops remain on the island. A buffer zone also known as the “Green Line,” patrolled by the U.N. Peacekeeping Force in Cyprus (UNFICYP), separates the two parts. The United States recognizes the Republic of Cyprus as the Government of Cyprus. It is also U.S. policy to better integrate the Turkish Cypriot business community into the global economy and to promote economic growth and opportunity in the Turkish Cypriot economy in order to pave the way for a comprehensive settlement and reunification. For clarity of presentation, this report outlines the different circumstances that pertain in these separately administered parts of the island. remained fairly strong at around 4.4% and 3.8%. The Cyprus government is expecting positive growth in 2010, although it is forecast to remain barely above zero (0.3. Amidst the turmoil, the banking sector on the island is holding up quite well, largely thanks to conservative banking practices, and a careful, conservative Central Bank that shielded Cypriot banks from some of the excesses of other financial centers. Inflation was contained to 0.3% in 2009 (lowest since 1965), although unemployment shot up to 6.2% (highest since 1976 for Cyprus, although still moderate compared to other EU states). Cyprus is one of ten countries to have joined the European Union (EU) on May 1, 2004. Even though the entire island entered the union, the EU acquis communautaire -- the body of common rights and obligations – applies only to the government-controlled areas and is suspended in the area north of the Green Line which is administered by Turkish Cypriots. The process of harmonization with the EU in the run-up to accession has transformed the economy of the government-controlled area, making it more open, liberal, and competitive. Among the many reforms which have already taken place are the following: liberalization of trade and interest rates, abolition of investment restrictions for EU residents and liberalization of the general investment regime for all non-EU investors, abolition of price controls, introduction of private financing for the construction and operation of infrastructure projects, and gradual liberalization of utilities Cyprus has been a successful member of the Eurozone since January 1, 2008, when it replaced the Cyprus Pound with the Euro. Joining the Eurozone was a major accomplishment for the Cypriot economy, resulting in such benefits as a higher degree of price stability, lower interest rates, reduction of currency conversion costs and exchange rate risk, and increased competition through greater price transparency. The final conversion exchange rate between the Cypriot pound and the Euro was one Euro per 0.585274 Cyprus pounds. The following website offers additional information on the mechanics of Cyprus's adoption of the Euro: http://www.euro.cy/ Area Administered by Turkish Cypriots: The self proclaimed “Turkish Republic of Northern Cyprus,” is only recognized by Turkey and controls about one-third of the island’s area and around a fifth of the population. Implementation of the EU acquis communautaire has been suspended in the area administered by Turkish Cypriots until political conditions permit the reunification of the island. In the four years between 2003 and 2006, the Turkish Cypriot economy recorded growth rates averaging around 13.4 percent per annum. This growth was fuelled by the relative stability of the Turkish Lira, a large construction boom, the expansion of Turkish Cypriot universities -- which cater mainly to Turkish and other international students -- and the employment of more than 4,000 Turkish Cypriots in the government-controlled area. However, since 2007, the economy in the north has grinded to a halt and went into recession, with real growth rates of 1.5 percent in 2007 and minus 1.9 percent in 2008. Construction activity, which boomed in 2005 and 2006, came to a bust in 2007 and 2008, while tourism and agriculture went reverse. The Turkish Lira is the main currency, although Pounds Sterling and Euros are widely used. Most businesses in the north are family-run and tend to be very small. Manufacturing is limited mainly to food and beverages, furniture and fixtures, construction materials, metal and non-metal products, textiles and clothing. Unemployment in 2009 was estimated at 9.8% and the total workforce was reported at 92,000 people. The minimum wage is currently USD 800 (1237 TL) per month. With hundreds of miles of coastline, medieval castles and antiquities, tourism is a major potential growth industry. Tertiary education is also one of the strongest sectors in the north. There are currently six universities attended primarily by students from Turkey. According to the “State Planning Organization," over 40,000 students, of which over 80 percent are foreign, registered for the 2007-2008 academic year. The absence of a political settlement and the lack of international recognition for the “TRNC” pose an inherent risk for the foreign investor interested in buying or leasing property in the area administered by Turkish Cypriots. Potential investors should be cautious and check out all the facts concerning purchasing or leasing property in the north. Unless the property in question was in Turkish Cypriot hands prior to 1974, it will be very unlikely that the title to the land will be free and unchallengeable. Property issues will be a key issue for any settlement of the Cyprus problem and will involve the return of property and/or compensation to pre-1974 owners. Estimates of the percentage of land in the north that belonged to Greek Cypriots pre-1974 run as high as 85 percent. Foreign buyers or lessees of land may face legal challenges from those displaced in 1974 either in Republic of Cyprus courts or courts in their country of residence. A recent UK court decision puts at risk the EU-located assets of occupants of Greek Cypriot-owned land in north Cyprus. Market Challenges Return to top Cyprus has been divided since the Turkish military intervention of 1974, following a coup d'etat directed from Greece. Since 1974, the southern part of the island has been under the control of the internationally-recognized Government of the Republic of Cyprus. The northern part of the island is administered by a Turkish Cypriot administration. In 1983, that administration proclaimed itself the "Turkish Republic of Northern Cyprus" ("TRNC"). The "TRNC" is not recognized by the United States or by any other country except Turkey. 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