Until recently foreigners wishing to invest in Cyprus were limited to acquiring minority control in Cypriot companies, and only in exceptional cases and after an intense and time-consuming examination of their application were they allowed to have majority control.
In recent years, the Central Bank of Cyprus, in view of the application of Cyprus to become a full member of the EU, has adopted a policy which aims at the harmonization of the economy of Cyprus with the economy of the other European countries.
In accordance with this policy the Central Bank has drafted a new policy, now pending the approval of the minister of finance and expected to be presented before the Council of Ministers in due course, which aims at the liberalization of foreign investments to and from Cyprus. This policy replaces the policy dating from 1986 now in force.
Existing foreign investment policy
Although each application is considered on its own merits, the general yardstick by which they are measured is the extent to which the proposed investment would be of benefit to the Cypriot economy. The criteria by which the appropriate authorities are guided are, among others:
- whether the product to be manufactured is one previously produced in Cyprus;
- the degree of technical and other expertise of the non-resident investors;
- the extent to which the proposed investment would result in increased exports, reduced imports, the development of existing markets and/or the penetration of new markets;
- the extent to which both human and natural resources, which would otherwise have remained idle, would be developed;
- the amount of foreign capital to be invested in certain approved areas of the economy;
- the extent to which the manufacturing sector of the economy is likely to be stimulated and the quality of products improved;
- the extent to which the existing local manufacturers would be either beneficially or adversely affected.
As a general rule, applications from foreigners in respect of investment in saturated activities are rejected and exceptional permission is granted only after obtaining the opinion of the relevant government department. Most traditional industries, tourism and the services sector are largely or completely closed to foreign investors.
Furthermore, under the existing policy Cypriot residents are not allowed, without the approval of the Central Bank, to invest outside Cyprus, to borrow from sources outside the country or generally to deal with non-residents.
The basic criteria under which Cypriots may invest aboard is the need to have the required know-how and expertise in the field in which the investment abroad will be made. Another requirement is that the investment abroad will be of indirect benefit to Cyprus. This may be indicated by the fact that it may lead to the indirect export of goods and services or help in bringing tourism.
As a rule portfolio investments abroad are not allowed (except those made by insurance companies), but other investment may be allowed, depending on the individual case and subject to conditions relating to the importation of profits and repatriation of capital and capital gains. In the case of an investment in the services sector, investors will be able to repatriate and receive royalties or management fees.
The new policy
The new policy will allow foreigners to acquire a 100% participation in Cypriot companies in all sectors, and will relax the requirements on Cypriots wishing to participate in investment abroad.
Under the new policy the only criteria foreign investors will have to fulfil is to prove that their new ventures will not pollute the environment, damage the economy, or constitute a security risk.
An application will have to be submitted to the Central Bank by a foreigner wishing to invest in Cyprus. However, the criteria and time taken to process the application will be reduced to the minimum.
The main advantage of the new policy is that where the application for foreign participation does not exceed 49%, the application will be considered by the Central Bank and it will not be necessary to obtain the opinion of the relevant government department. In the case of an application for a 100% participation, the Central Bank will have to obtain the opinion of the relevant government department. However, the examination procedure will be relaxed.
The new policy provides for only a limited number of saturated activities, which are land development, culture and education and public utilities. The banking, insurance, financial, printing and publishing sectors will be subject to a special regime. The Central Bank will examine applications for foreign participation in these sectors and will decide on the percentage of participation and its terms and conditions.
The Central Bank has also decided to relax the terms and conditions under which Cypriots can invest abroad. The new regulations will significantly reduce the time taken to deal with applications and to issue decisions. Under the new policy Cypriots can invest abroad an amount of up to C£1 million (US$2 million).