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Cyprus Delivers New Boost to Fintech, Funds Innovation Clusters

Cyprus is offering an enticing deal for tech companies and ICT specialists to relocate to the island as they seek more cost efficient and less crowded countries that offer a better lifestyle alongside strong telecommunication and digital infrastructures in the wake of the Covid pandemic.

Under the new Immigration Framework initiative, tech companies are entitled to employ up to 15 third-country nationals as directors and middle management executives, and any number of qualified third-country nationals in possession of required ICT skills, including: software and system engineers; ICT and enterprise solution architects; machine learning engineers; web developers and designers; cyber security specialists and AI, robotics and big data specialists.

As a member of the European Union, citizens from all European Economic Area (EEA) member states can freely work in Cyprus, without permission. The Framework means there are now no restrictions on the maximum duration of stay of third-country nationals, while employees with residence and employment permits have direct access to family reunification with their spouse and minor children, provided that the necessary conditions are met.

Investment has been boosted by a low corporate tax of 12.5% and a developed network of over 60 double tax treaties. Cyprus also offers an 80% tax exemption, on qualifying profits arising out of the exploitation of R&D intellectual property qualifying assets (Cyprus IP Regime). The effective tax rate for corporate income, taking advantage of this incentive, can be as low as 2.5%.

The initiative complements existing national strategies to integrate innovative tech that include generous fiscal incentives to attract IT start-ups and regional headquarters and is being spearheaded by Invest Cyprus, the national investment promotion agency.

Invest Cyprus chief executive George Campanellas said: “The world is changing and with Europe fast becoming a tech haven for talent and companies, Cyprus provides a very safe and attractive destination for tech firms and non-EU investors.

“We are now taking enquiries from tech companies on a daily basis. We have visited California and other tech hubs in the US, and cities in Israel, Ireland and Eastern Europe countries and we can see that Cyprus is well positioned to become among the top European destinations for setting up regional headquarters and development centres.”

Cyprus’s commitment to innovative research and its rapidly growing start-up ecosystem is supported by a generous support package with state and EU funds to spend on a number of key projects over the next three years. The funds will go towards various initiatives including the creation of new innovation clusters to bring together entrepreneurs, researchers and academia as well as digitalising over 160 state services and cybersecurity projects.

The dynamic FinTech movement in Cyprus comprises nearly 250 FinTech including start-ups, offering services ranging from real time investment portfolio securitisation and advanced performance analytics to automated order processing.

In Limassol alone, a community of more than 8,000 ICT professionals serve the FinTech industry, and it is home to some of the world’s leading names in RegTech, the ‘Internet of things’ (IoT) and cybersecurity. Among them is AmDocs, which has around 1,000 software programmers living and working in Cyprus, the multi-asset online social trading firm eToro, and Point Nine, an industry leader in outsourced operations, processing and reporting that was recently acquired by Mitsubishi UFJ Financial Group through its subsidiary in Cyprus.

Gaming platforms also feature prominently in the new tech space in Cyprus. This year Nexters Global, the Cyprus-based mobile and social game developer behind Hero Wars and Throne Rush, cemented a $1.9 billion deal with Kismet Acquisition One Corp, reflecting the strong progress it has made since moving its operations to Cyprus in 2017.

For entrepreneurs looking for a European base to begin operations, Cyprus takes some beating. Strategically located at the crossroads of Europe, the Middle East and Africa, Cyprus is an internationally recognised financial centre, with a sound banking sector and a well-established common law system. Both the banking sector and the fully comprehensive FX industry in Cyprus have opened to technological development and regulators and competent authorities take a positive pro-business approach to facilitating fintech activity – all of which offers optimal conditions for new and existing players.

To encourage the wide transformation of financial services, the Cyprus Exchange & Securities Commission (CySEC) launched the ‘Innovation Hub’ in 2018, a regulatory ‘sandbox’ to enable a seamless transfer of information as to how existing regulation applies to new products or business models, whilst also helping identify what regulatory frameworks might need to be established to meet evolving needs – all without stifling innovation.

The business models represented in the Hub include regulatory and AML compliance tools based on big data analytics and data reporting, the use of Distributed Ledger Technology (DLT), AI tools and a venture capital fund investing in blockchain start-ups.

A recent evaluation of Cyprus’s fintech laws and regulations by the Legal500.com guide concluded: “We do not identify any imminent risks to fintech growth. On the contrary, regulators’ positive disposition towards fintech should encourage its further development.”

“These continuous efforts to upgrade the legislative and regulatory regime in Cyprus, and adoption of new technologies to ensure investor protection and service quality, has also made the island one of the top emerging investment fund centres in Europe,” said Campanellas. “Its visibility has been greatly enhanced by being able to list Cyprus funds on international platforms such as Bloomberg, Clearstream, Morningstar and Refinitiv.”

Other thriving fintech companies include crypto-trading platforms and crypto-exchanges, and companies offering alternative payment solutions. Having adopted a national blockchain strategy in 2019, Cyprus has been highly successful in attracting investment capital, with 27 blockchain startups having raised a total of €142 million in funding. Cyprus has also been a trailblazer in blockchain. The University of Nicosia is the first university in the world to offer a Masters in Digital Currency and also the first to allow fees to be paid by Bitcoin.

“Cyprus has the capacity to become one of the great technology hubs in the world. Amongst our strategic priorities is to showcase Cyprus as an ideal EU location for international high-tech companies to base their operations and scale-up. In this context, we focus our efforts towards empowering a new generation of tech entrepreneurs, and nurturing a culture of innovation and entrepreneurship,” said Campanellas.

Article By

George Ayiomamitis

 

Cyprus: Government Assistance During the COVID-19 Pandemic

The global pandemic of COVID-19 has left no country unaffected, with a second wave currently sweeping through Europe. Since its arrival on the island in March 2020, the Cypriot government closely monitored the situation and acted swiftly. Early lockdown measures and widespread testing were effective in flattening out the initial infection curve, providing valuable reaction time to better equip and organise the healthcare system with medical resources and staff. The government’s response subsequently shifted from containment of the virus, which had brought the economy to almost a virtual standstill, to a re-opening of the economy with reinforced protection. To this effect, various measures, plans and schemes were enforced by the government in order to support the economy, its citizens, and workers from the severe impact of the pandemic.

As part of a budgetary policy response in the wake of COVID-19, Cyprus introduced its “Stability Programme 2020–2023”. The aim of the Programme has been to provide emergency relief and support the Cyprus economy under the present exceptional economic crisis that has arisen as a result of the pandemic. One of the measures introduced by the Stability Programme was the suspension of loan instalments for enhancing liquidity, enabling a payment moratorium for nine months to apply to credit-worthy borrowers that have been affected by the restrictive measures imposed by the authorities.

These temporary measures are applicable for a period from 30 March 2020 to 31 December 2020. The moratorium covers capital, interest and compound interest payments, and both physical and legal entities are eligible.

Liquidity Aid Measures

In addition to the above in May 2020, the Cyprus government announced further stimulus measures to “jump-start” the Cypriot economy, impacted by the COVID-19 pandemic, with major input from the European Investment Bank (“EIB”), in the form of loans worth approximately EUR 1.2 billion, along with interest rate subsidies for businesses and housing loans. By utilising the tools provided by the European Union and European financial institutions, the Cyprus government introduced various liquidity aid measures, as follows:

Pan-European Guarantee Fund

By participating in the Pan-European Guarantee Fund (established to tackle the adverse economic consequences of the pandemic), and in return for a contribution of EUR32.5 million, Cyprus expects to be allocated EURO 300-400 million of direct guarantees from the Fund for the needs of businesses. The Fund will guarantee up to 80% of the bank’s indebtedness to small- and medium-sized enterprises employing up to 3,000 people, with the caveat that they must not have laid off staff during the lockdown period. The guarantees are intended to encourage the banks to cover working capital shortfalls for businesses that were viable before the onset of COVID-19.

State Guarantees

The government will provide an additional EUR 500 million of state guarantees to the EIB, which will, in turn, advance loans at more favourable interest rates to businesses in the small- and medium-sized enterprise sector.

The Cyprus Entrepreneurship Fund

The Cyprus Entrepreneurship Fund will be expanded by EURO 800 million. Businesses with a maximum of 250 staff will be eligible to apply for a maximum loan of EURO 1.5 million, repayable over a period of up to 12 years at interest rates currently ranging from 2.55% to 4.5%, depending on the perceived risk of the loan. The Cyprus government will fund 50% of the new money via a loan from the EIB, with local lenders providing matching funding with a 50/50 split of the risk between the parties.

Scheme to Subsidise New Loan Interest Rates

A scheme that will subsidise interest rates for new loans taken out between 1st March 2020 and 12th December 2020 provided that the maximum interest rate for such loans does not exceed 4.25%. The subsidy will run for four years and cover loans taken out between 1st March 2020 and 12th December 2020, provided that the maximum interest rate on them does not exceed 4.25%. All previously viable businesses adversely impacted by the pandemic will be eligible to participate.

The loans may be used for the purpose of investment or, as working capital, but they cannot be used to repay existing indebtedness or for the purposes of restructuring a business.

Tax Measures

Aside from the aforementioned measures, and in order to further aid business liquidity, numerous tax and other measures were implemented, providing temporary suspensions of the duty to pay VAT (without any penalties) for February, March and April 2020, until November 2020, and an extension for the submission of tax returns and the settlement of overdue tax liabilities. Relief from import duties and VAT on imports of goods needed, from the European Commission to combat the effects of COVID-19 for the first seven months of 2020, was introduced as a further measure.

Extensions of two months were provided for the settlement of overdue contributions to social-insurance-related funds.

The increase in special contributions regarding the General healthcare system (GESY) was suspended for the period of three months, applicable from April–June 2020.

Business Suspension of Operations Schemes 

Certain business and other emergency measures were quickly introduced to alleviate hardship in households, to support businesses and to prevent termination of employees’ employment.

Among these was the payment of unemployment benefits to employees under the plans for the Complete or Partial Suspension of Business operations. This was an extremely useful measure, as business employers were encouraged to retain their employees during the lockdown period between March–May and thereafter, and to participate in these schemes, under which the employees received a percentage of their salary ranging from 60% for partial suspension, to 90% for complete suspension of business operations (in the form of a state benefit). During this period for which Special Unemployment Allowance was paid, the employer’s duty to pay the salaries was waived with regards to employees who received the allowance. A business employer could participate in the Special Complete Suspension Scheme, subject to it not carrying on any business other than the administrative work of the business while the entire business was required to suspend activity, provided by the decrees of the related Ministries and decisions taken by the Council of Ministers and in addition that the business’s nature was not altered. A business employer could participate in the Special Partial Suspension Scheme, provided its operations were partially suspended due to its turnover decreasing by more than 25% in March 2020 until April 2020, in comparison to the previous corresponding period and such decline in turnover was caused solely by COVID-19.

One of the essential conditions to enable participation in the Scheme was the pre-requisite that no employee had been dismissed from 1st March 2020, and once approved to participate in the scheme, no employee could be dismissed for the duration of business participation in the scheme and for an additional period equal to the period of participation – plus an additional month, except for reasons justifying dismissal without notice. Hence, participating businesses were unable to dismiss employees for financial reasons during this period.

Other Measures

Other measures included special sickness benefits, special leave for the care of children, and amendments to the Statutory Tenants Law to suspend eviction of tenants until the end of May 2020.

Conclusion

In summary, the Cypriot government took immediate measures to combat and contain the effects of the pandemic, and has continued to take measures to restart much of the social and economic activity which came to a standstill in the past months, as well as to support the economy through these challenging times. How substantial and effective these measures will be to relieve and reverse the socioeconomic impact of the pandemic, especially in light of the inevitable domino effect of other world economies and how they fare from the crisis, remains to be seen.

Alternative Investment Funds in Cyprus

Cyprus in the last few years is establishing itself as one of the top investment fund centers in Europe.

The Fund management industry is fast becoming one of the most promising sectors of Cyprus economy. The volume of funds and assets under management have shown huge increase, as assets under management have more than tripled from €2.1 billion in 2012 to €6.8 billion in June 2019.  Assets under management are expected to reach €20 billion in the next five years.

What is an Alternative Investment Fund or AIF in short?

Alternative Investment fund is joint investment agreement raising capital from a number of investors with a view to investing it in line with an investment policy for the benefit of the involved investors.

Legal framework.

Alternative Investment Funds legislation has aligned Cyprus legal and regulatory framework with the European directives on asset management enhancing transparency and investor protection.

Cyprus has introduced a new law offering more investment structuring possibilities and upgraded rules for the authorisation, on-going operations, transparency requirements and supervision of Cyprus AIFs. In addition, new rules shape the regulation on the role and responsibilities of their directors, custodians but also external managers.

AIFs that are established under domestic Cyprus fund legislation can be sold on a private placement basis or marketed to professional investors across the EU under the AIFMD passport.

An AIF can take the following legal forms and may be established with limited or unlimited duration:

  • Fixed Capital Investment Company – FCIC
  • Variable Capital Investment Company – VCIC
  •  Limited Partnership – LP
  • Common Fund – CF

A Variable Capital Investment Company (VCIC) and Fixed Capital Investment Company (FCIC) may be set-up as self-managed, or it may be externally managed. A Limited Partnership (LP) and Common Fund (CF) must always appoint an external manager.

Types of Investors.

Professional.

A professional investor is the person who has the experience and expertise to make his/her own investment decisions and assess the risks involved. The investor must also comply with the criteria prescribed in the Markets in Financial Instruments Directive.

Well-informed.

When a person is not considered a professional investor confirming in writing that he is a qualified investor aware of the risks involved with an investment in the relevant AIF. Also, a Well-informed investor has to make an investment of a minimum €125,000 or has been evaluated by a licensed bank, or an authorised investment firm or an authorised Management Company that he has the experience and knowledge in evaluating an investment opportunity.

Retail.

Any investor who not considered either professional or well-informed investor.

Types of AIF’s. There are two different types of AIF’s.

AIF with unlimited number of persons.

  • May be marketed to “retail”, or “well-informed” and/or “professional investors”
  • Freely transferable investor shares
  • Minimum capital requirements of €125,000 or €300,000 if a self-managed fund
  • Must be appointed to a global custodian
  • Can be listed on stock exchange, and AIFs marketed to retail investors can be traded
  • Depending on the investor type and the overall investment policy may fall under certain investment restrictions

AIF with limited number of persons.

  • May be marketed only to “well-informed” and/or “professional investors”
  • Cannot exceed total number of 75 investors / unit holders
  • Freely transferable investor shares, with the condition that their transfer does not result in the AIF having more than 75 investors
  • May not be required to appoint a licensed manager or a custodian in some cases
  • Assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (5-year lock-up period without leverage)

Tax advantages of AIF in Cyprus.

  • Notional Interest Deduction (NID) for new equity may reduce taxable base for interest received by up to 80% (for company-type funds) reducing the effective tax on interest to 2.5%Tax resident funds are eligible to all benefits under a double tax treaty or the EU Directives
  • Services provided by the Investment Manager of fund are not subject to VAT
  • No withholding tax on any type of payments to non-residents
  • No subscription tax on net assets of a fund
  • Extensive network of Double Tax Treaties in place with more than 60 countries
  • Dividends received, capital gains arising from sale of property abroad, capital gains from sale of shares of foreign property companies are excluded from tax

Other advantages of AIF in Cyprus.

  • Easy to set-up, cost-efficient management and operations
  • A framework fully in line with EU directives
  • Full transparency through annual audited reports to CySEC and investors (That includes financial statements, borrowing information, acquiring portfolio information and Net Asset Value)
  • Supervised by a competent and accessible regulatory authority
  • No restrictions imposed by the Regulator on type of investments
  • Can be self-managed – subject to the approval of the Regulator
  • Can be set-up as umbrella funds with multiple compartments
  • Can be listed on Cyprus Stock Exchange and other recognised EU stock exchanges ( in case the number of investors is not limited)