In recent years, Cyprus has cultivated a thriving tech eco-system, positioning itself as a strong innovator, with a commitment to driving competitiveness and strategic service delivery. The country’s ICT sector is said to have contributed €3bn+ to the Cypriot economy in 2022, constituting 13% of the country’s GDP—a substantial leap from 7% in 2019 and 8.5% in 2020. Notably, €1bn is reportedly attributed to the influx of international firms and specialised human talent to Cyprus, a trend accelerated by the conflict in Ukraine.

In 2023, we observed Cyprus make remarkable progress in the technology sector. Fuelling this growth was the emergence of tech start-ups and digital enterprises, supported by government initiatives and organisations like TechIsland, Cyprus’ largest tech association, designed to attract high-calibre tech corporations worldwide. With over 270 member companies, TechIsland aims to enhance the tech industry’s operating environment, unite diverse stakeholders, and promote sustainable growth, contributing significantly to the country’s economic prosperity through tech.

Championing innovation and legal reform

Elias Neocleous & Co (ENC) has been an ardent supporter of Cyprus’ tech initiatives, which includes cementing the island as a sought-after jurisdiction for technology companies, start-ups, and tech enthusiasts. Our goal of streamlining the process of relocation for these entities and individuals to the country is ultimately what led to the launch of a new tech law department which serves as a single point of contact for tech-related enterprises wishing to establish a presence on the island, looking after all their needs from A to Z.

Additionally, our firm has taken great strides to invest in a future driven by digital transformation and ongoing social and technological changes. Our focus on new technologies, the upskilling of talent, the development of specialised services, and building strategic partnerships fall under the scope of ENC’s legal tech hub, the first of its kind for law firms in Cyprus. The first major project of the hub was the development of Neolaw.ai, a revolutionary tool that combines law with the firm’s extensive knowledge base using AI capacities to become an indispensable legal assistant and knowledge repository for in-house and practising lawyers in Cyprus and abroad. In 2024, we will continue to explore ways in which neolaw.ai can be leveraged to assist tech start-ups with commencing their operations at a price point that considers the financial position of early-stage businesses.

Looking ahead in 2024

As the year kicks off, Cyprus is poised to sustain its tech boom as the country solidifies its position as a highly sought-after jurisdiction for tech decision-makers aiming to establish a global presence in a business-friendly environment. To support its ambition of becoming a technology hub, the Cyprus government will persist in advancing innovative national strategies, underscoring its commitment to facilitating the relocation of individuals and groups, and enhancing Cyprus’s appeal as a destination for professionals contemplating such a move. These efforts seamlessly align with the country’s strategic geographical proximity to EU, African, and Asian markets. Coupled with enticing incentives such as a low corporate tax rate and progressive immigration measures like the Blue Visa legislation, Cyprus emerges as an exceptionally attractive choice for both global and regional tech multinationals.

The robust regulatory and legal framework of Cyprus, built on established EU standards and UK common law principles, adds a layer of consistency and predictability for tech businesses considering relocation or establishing headquarters on the island. Furthermore, the country’s strategic intellectual property (IP) regime, operating on a nexus approach, offers significant tax advantages, including an 80% tax exemption on R&D expenditure and tax amortisation of intangible assets for up to 20 years.

‘Our focus on new technologies, the upskilling of talent, the development of specialised services, and building strategic partnerships fall under the scope of ENC’s legal tech hub, the first of its kind for law firms in Cyprus.’

The appeal of Cyprus will be further heightened by its advantageous corporate tax regime, boasting one of the lowest tax rates in Europe at 12.5%. Notable features include exemptions from corporate tax on various income sources, notional interest deductions on investments, and flexible practices for managing tax losses. A strong network of double tax treaties covering approximately 60 countries will continue to provide strategic advantages for international operations.

Cyprus also stands out for its highly skilled workforce, ranking among the highest in Europe for university graduates relative to its population. The country’s tech-savvy human capital contributes to a flourishing technology ecosystem, complemented by cost competitiveness in operating a technology company.

Embracing a dynamic future, we anticipate Cyprus thriving as a global tech hub. With a booming sector, national IT strategies, and the promotion of emerging technologies, our firm stands at the forefront. In 2024, we remain cognisant of the need for digital transformation across industries and are geared to empower tech start-ups and advance Cyprus’s appeal with its strategic advantages.

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Crisis is an overused term, worn out by endless repetition. For most European economies, it has meant a period of low or stagnant growth over the last decade and, in some cases, a year or two of negative GDP eventually followed by a welcome recovery. For Cyprus, however, the word has had even greater potency: between 2008 and 2015, GDP per capita declined by roughly 30%. On top of the global 2008-09 recession, Cyprus had its own domestic banking crisis in 2012-13, precipitated by the eurozone collapse. This led to a downgrade of its bond credit rating to junk status and a €10bn bailout programme from the troika of the European Commission, the European Central Bank and the International Monetary Fund.

It would be all too easy to dismiss Cyprus based on this performance – except that the island’s economy is experiencing a belated rebound. And what that means for investors in the medium term is significant. Despite financial services activity continuing to have a negative effect on the economy, latest GDP figures show a healthy 3% growth, which ‘surpasses all expectations’, according to finance minister Harris Georgiades.

Meanwhile, rating agencies recently raised Cyprus’ sovereign credit rating to a notch below investment grade – on the expectation that the economy will continue to develop at a reasonable pace over the next three years. Even more good news has arrived in a recent report from Transparency International, which found that Cyprus’ application of regulations has been so successful that it now disclosed the most complete set of anti-money laundering data among 12 countries analysed, including the US and the UK.

‘It’s perfectly transparent now: the banks are controlling every single penny moving around,’ says Andreas Haviaras, managing partner of Haviaras & Philippou. ‘They are doing business like everybody else in Europe from their offices in Cyprus; there is nothing secret or devious in this process. We haven’t created stricter laws, but the application of existing legislation is now stricter.’

Add to that the potential of offshore gas reserves and renewed discussion of possible reunification between the Turkish and Cypriot halves of the island after more than 40 years of partition, and the outlook for Cyprus looks brighter than at any time this decade. For local law firms, all this comes as welcome relief. ‘The economy was dealt an extremely serious blow,’ says Stelios Triantafyllides, partner at Antis Triantafyllides & Sons. ‘Clearly we have come out of the woods. It is apparent from the level of activity we see that trust has come back to the Cyprus economy, and our business has come back up to pre-2015 levels.’

‘It’s perfectly transparent now: the banks are controlling every penny moving around. There is nothing secret or devious.’
Andreas Haviaras, Haviaras & Philippou

At Elias Neocleous & Co, managing partner Elias Neocleous says: ‘There is hope that by the end of this year or early next year our sovereign debt will be taken out of junk status. We have been putting in tremendous effort, such as structural reforms, in correcting the balance sheets of the banks, in making sure the economy is becoming more competitive, and this is very positive. We’ve been registering decent rates of growth for the last eight or nine quarters – that is very good news.’

Pavlos Aristodemou, managing partner of offshore firm Harneys in Cyprus, agrees: ‘Growth and expected growth is giving a good momentum and allowing international institutional and private investors to look seriously at investing in Cyprus. In terms of IPOs, the stock exchange in Cyprus is not in the shape we would like it to be. Having said that, the Cypriot companies are still widely used as vehicles for IPOs and bond issues on foreign-regulated markets.’

Diversity drive

The Cypriot economy, the eurozone’s smallest, remains predominantly service driven. Prior to 2013, its position as a Mediterranean hub attracted significant international investment, particularly from Russia, with nearly half of all Cyprus bank deposits being of Russian origin. Moody’s estimated that figure to be $31bn – $12bn from banks and $19bn from businesses and individuals. As a precondition of its bailout, the troika imposed a haircut: a deposit levy for shareholders, bondholders, and depositors on accounts in the two biggest Cypriot banks.

An obvious after-effect has been an abundance of non-performing loans. ‘In terms of the banks, non-performing loans are a very high percentage of the country’s total gross loans,’ says Stelios Americanos of Stelios Americanos & Co. ‘This is one of the major problems that still needs to be tackled. We act for major international lenders that have provided significant loans through Cyprus holding companies for projects abroad. So when these loan agreements are in default, there is a need to enforce in Cyprus: that’s what we do on their behalf.’

The inevitable fallout has also caused a prolonged and predictable spike in litigation and insolvency work, particularly significant shareholder disputes.

‘One impact of the haircut was that businesses or projects, which were adequately financed at the outset, found themselves with no funds,’ notes Haviaras. ‘That inevitably caused internal conflicts between partners. We have a lot of litigation involving Russian entrepreneurs, mainly caused because of their disputes as shareholders in Cyprus companies.’ He confidently anticipates that this will continue to feed the volume of litigation work for up to ten years.

‘As the inflow of new companies has reduced, the amount of litigation has increased: half of our lawyers are doing litigation,’ adds Triantafyllides. A further spur should become evident with the creation of a new commercial court, for which there is currently a Bill pending. Americanos observes: ‘It is now for the government to speed up the process and for Cyprus to become a reputable litigation hub.’

Notwithstanding the high level of disputes, Russian investment in Cyprus as its preferred offshore centre remains strong, although the emphasis has notably shifted. According to Demosthenes Mavrellis, a partner at Chrysses Demetriades & Co, Russian clients have changed their approach to Cyprus: ‘Russian-focused business has not by any means disappeared and we now see more development of substantial presences, with the opening of offices and movement of actual staff to Cyprus. It must be said that this environment is now favourable for the larger firms with comprehensive and complex legal capacity.’

However, there are plenty of health warnings about Cyprus’ recent dependence on Russia, particularly given the effect of EU and US sanctions. As a result of these and low commodity prices, Russia has experienced negative growth. This year, Russia is predicted to register a modest rate of growth with the attendant benefits for all countries it does significant business with, including Cyprus. But, says Neocleous: ‘From our standpoint there is a certain danger in over-relying on any particular market or type of work. For several years, our firm has therefore followed a deliberate policy of diversification: we are trying to build links with, and develop work from other countries such as China, India, the Middle East, Africa, even South America.’

His sentiment is echoed elsewhere. Harneys, which benefits from strong referrals from its international network, is the only major international offshore firm to have an office in Cyprus. ‘The origin of clients has changed,’ says Aristodemou. ‘Although the majority of corporate clients are still from Russia and the CIS, different countries are catching up and now there are more US, UK and Asian clients. We see more instructions from China, Hong Kong and Europe. Together with an increase in the volume of our work, the geography has altered.’

‘Although the majority of corporate clients are still from Russia and the CIS, different countries are catching up. The geography has altered.’
Pavlos Aristodemou, Harneys

Americanos concurs: ‘There is more diversity. The volumes are not what they were, but we have some structures coming from all over the place: Eastern Europe, Canada – structures related to the Gulf region.’ Haviaras has seen an increasing flow of business from Balkan investors financed by Austrian banks, as well as ‘a big leap forward in investment from China to create wealth – houses, flats, bonds – a lot of Chinese investors trying to meet the relevant criteria to enable them to claim a Cyprus passport.’

Meanwhile, Aristodemou points to the double taxation treaty with India, agreed by Cyprus last November, as providing enormous opportunities, ‘although we have not yet seen the fruits of it’. The large number of such double taxation treaties – nearly 50 – makes Cyprus different from most other offshore jurisdictions. Their general effect is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will also enjoy the same exemptions in the treaty countries.

Neocleous, however, offers a further note of caution, suggesting the future of Cyprus depends on its ability to maintain an attractive business and tax-friendly regime. This may not be entirely within its control: as part of the EU and the eurozone, Cyprus may be forced to change laws, or its tax regime, in a way that will make incentives less friendly or unavailable to entrepreneurs. ‘That is a threat that concerns us: it is vital for Cyprus to continue to offer tax incentives so that foreign investors can come here,’ he concludes.

In the broader economy, the oil and gas industry is singled out as an exciting and potential area of growth. Last December, ExxonMobil, Total, Eni and Qatar Petroleum were among those to win licences to explore and drill for oil and gas off Cyprus’ southern coast. The gas located there to date provides estimated reserves exceeding four trillion cubic feet worth over $50bn. While it has huge potential, Americanos says this is just groundwork so far – companies exploring possibilities – so there is no real impact yet, but this is something that everybody expects to be developed, and the government is committed to finding reserves.

Nevertheless, Haviaras is sceptical about the impact for local firms. ‘The oil and gas sector will definitely put money in the box,’ he says. ‘But if Cypriot professionals want to be honest with themselves, they must admit that they do not have experience in this sector, simply because: we didn’t have gas yesterday. So I see room for international firms, which do have the experience from the UK and US – they could jump into this field, employ or co-operate with Cypriot firms, either generally or for specific projects, for the benefit of both.’

Neocleous goes further, identifying oil and gas as a possible incentive for reunification. ‘If we were able to hit any major new discoveries that could be a catalyst,’ he says. ‘Everybody would realise that this is the best opportunity to reunite in peace, to create more business opportunities for everybody and for the citizens of the island and for all the neighbouring countries.’

Better together?

Reunification talks have been taking place for several months under the auspices of the United Nations in New York. Cyprus has been partitioned since the summer of 1974 when Turkish troops seized the northern third of the island; the two parts are divided by a UN buffer zone. According to former US vice-president Joe Biden, who has been personally involved, the two sides are ‘close to resolution’.

Triantafyllides suggests that reunification discussions are not having a direct impact at present and nobody has seen any difference in the level of business activity. However, the hope is that if there is a solution, this will obviously create a lot of development and growth. According to Aristodemou: ‘Any proposed solution will need a referendum to be agreed on both sides. Many people put natural gas in the equation. It will, of course, open up a huge market: Turkey. You would see a huge momentum in FDI – the northern part of the island needs major construction projects and infrastructure.’

Further privatisation will help bolster the public purse while also providing work for lawyers but, as Triantafyllides points out, it cannot go on forever. Presently, the privatisations of Cyprus Telecommunications Authority (CYTA) and the state-owned electricity company (EAC) have been delayed by the adjustment programme. The European Bank for Reconstruction and Development, which began operations in Cyprus in 2014, has listed privatisations among its key targets. The port in Larnaca is likely to be privatised this year, with plans to sell the country’s state lottery also progressing.

Neocleous concludes by offering a picture of Cyprus in its geographical context. ‘If you look around us, literally there is volatility and turbulence in almost all the neighbouring countries and therefore we are viewed as an oasis of stability: a country that is within the EU; a country that has a system that everybody can rely on. Therefore, many people, including entrepreneurs from these turbulent countries, can come here and create a place of business, or a second home as a reserve solution in case something goes wrong in their home country. That is now providing many benefits to Cyprus.’ LB

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On the face of it, Cyprus has much to celebrate. In March, the country completed the three-year economic adjustment programme that followed 2013’s €10bn bailout package agreed with the European Commission, European Central Bank and the International Monetary Fund. That the country has finally wrested back control of its finances was coupled with the Commission’s prediction of a 1.4% rise in GDP for Cyprus in 2015 – the first year of economic growth since 2011.

This good news provides a psychological boost following years of financial turmoil, but even the most ardent optimist would concede that Cyprus has a long way to go. The island is mired in debt and faces a lengthy period of post-programme surveillance (PPS) by the Commission, which will continue until it has paid at least 75% of the €7.25bn in loans it received from the bailout. The Commission estimates that, ‘barring any early repayments’, the PPS will continue till at least 2029. Alongside this are the €26.7bn of non-performing loans (NPLs) that the country’s banks must deal with. According to the World Bank, in 2015 these NPLs accounted for 44.8% of the country’s total gross loans, a figure much higher than Greece’s 34.4%. These factors will define Cyprus’s economic future for many years to come, both on a macro and micro level. Fundamental to this is how Cyprus positions itself in the global economy, particularly now that one of its key investment partners, Russia, can no longer be relied upon to generate previous levels of work.

Russian crisis

The most recent Russian legislative hit came in December 2015 where, similar to the US Foreign Account Tax Compliance Act (FATCA), it requires foreign banks to notify the Russian authorities when a Russian opens an account with them. This followed 2014’s ‘deoffshorisation’ law, which tightened rules on how Russians must report and pay tax on their offshore income. With Cyprus the preferred offshore jurisdiction for Russian investors, these changes have taken their toll.

‘Unfortunately the work in Russia has slowed down considerably and we have been affected by several major factors,’ says Elias Neocleous, head of the corporate department at Andreas Neocleous & Co. ‘The first is the Russian sanctions. Business has been reduced because of the sanctions and because of the devaluation of the rouble. Then there are the deoffshorisation laws, and a Russian FATCA, which make it difficult for entrepreneurs to channel their investments through other countries.’

For many Cypriot law firms that provided corporate services to Russian clients who structured and registered their companies through Cyprus, this has cut off a major revenue stream. It is estimated that some 150,000 companies with Russian beneficial owners are registered in Cyprus, and prior to the Cypriot banking crisis in 2013, the ratings agency Moody’s estimated that there was about £21bn of Russian money in Cypriot bank accounts. However, since many Russian depositors got stung by the 2013 bail-in, which took uninsured bank deposits over €100,000 and converted them into shares in the Bank of Cyprus, trust in the Cypriot banking system unsurprisingly has diminished.

‘The combination of tougher Russian laws and the deterioration of the local economy has meant that a lot of Russians have decided not to keep their foreign structures,’ says Neocleous. ‘Most liquidate their structures and repatriate their money in Russia, as the taxes aren’t too bad there. The more sophisticated clients keep their structures but make them more open and transparent. Some would like to keep some money abroad for safety and security reasons, particularly for their non-Russian investments. Some keep their assets abroad, fearing bad developments in their mother country, so we see some setting up businesses, combined with private wealth and a home. In general, things are much tougher for professionals. Clients are very price-sensitive, so margins are lower.’

Most of the major full-service firms claim that the decline in new company registrations has been offset by other areas, such as disputes.

‘In a nutshell, the Russian market doesn’t bring fresh corporate work,’ says Andreas Haviaras, managing partner of Haviaras & Philippou. ‘It’s bringing a hell of a lot of fresh litigation. For firms like us, that are mainly litigators, we are very happy. I would say about 70% of our work is Russia-based. It should be there for at least three to five years. That is how long it takes to clear a court case. From that point onwards, I don’t know.’

The nature of the disputes, and the role that Cypriot lawyers are playing in them, is also starting to change. Traditionally, the cases were in support of foreign proceedings and international arbitration, but litigators are now seeing a rise in cases led through the domestic courts. This is largely due to the rise in internal shareholder disputes where the articles of association won’t allow for arbitration.

‘In the past I would say that 90% of the cases we had were LCIA [London Court of International Arbitration] arbitrations in London and the Cyprus proceedings were in aid of that application,’ says Haviaras. ‘Now we also have direct claims before the Cyprus courts without LCIA applications in the middle. This is because we’ve seen a growth in internal conflicts within Cyprus companies owned entirely by Russian shareholders.’

Aside from the rise in domestic-led court actions, the fact that many firms are so experienced in cross-border disputes also helps contribute to the sense that Cypriot lawyers provide a safe pair of hands.

‘We have a very good legal system based on English common law,’ says Menelaos Kyprianou, managing partner of Michael Kyprianou & Co. ‘This, combined with the fact that Cyprus has become an attractive place for companies to set their bases, is why we’ve seen a number of cross-border disputes. This has been maintained, despite the recent issues in the economy.’

Keeping it clean

The quality of Cyprus’s legal infrastructure and the experience of its top practitioners is key to how the country positions itself for future foreign investment. And even though there has been a drop-off in the volume of Russian corporate instructions, the quality of the mandates are not suffering.

‘The offshore industry is changing significantly,’ says Pavlos Aristodemou, the managing partner of Harneys’ Cyprus office. ‘What we see now is the big groups and conglomerates using international structures, so more groups coming to Cyprus with real substance, and being managed and controlled from Cyprus. This is changing and is in line with the OECD [Organisation for Economic Co-operation and Development] guidelines. In terms of the legal market, the revenues that you get from such a group are 20 times larger, but then you have 20 times less volume.’

This comes as Cyprus and its professional services industry tries to shake off the perception that it is part of a nebulous offshore network, particularly where Russians and Russian companies are involved.

‘The key is that Cyprus has decided to move upscale, which means we’re trying to target a different audience as a potentially new jurisdiction for bigger clients,’ says Neocleous. ‘We’ll be looking at bigger, more sophisticated companies. Companies can’t come here to set up brass-plate operations and mailbox companies.’

At the time of writing, the massive data breach suffered by the Panamanian law firm and offshore specialist Mossack Fonseca & Co was dominating global headlines. Most Cypriot lawyers, however, balk at the notion that what they do is in any way comparable to the situation in Panama.

‘We want to operate in a transparent manner,’ says Demosthenes Mavrellis, a corporate partner at Chrysses Demetriades & Co. ‘We want good corporate clients. We favour quality clients. We are a jurisdiction with a competitive edge in tax and service, a good price-to-quality ratio, and furthermore an EU state. We are what I call “mid-shore”.’

The hope is that Cyprus will establish a position similar to Ireland or Luxembourg, as a convenient entry point for companies and investment funds investing in and seeking investment from the EU. It won’t necessarily take business from those two jurisdictions, but Cyprus is certainly positioning itself for more respectable work coming from other markets, and not just Russia and the CIS. For those firms with a strong track record representing international clients, it is an opportunity to cement their position in the market and expand the scope of their advice, away from the narrow-margin work and towards more lucrative, value-added areas, such as regulatory and finance.

‘It is encouraging for major law firms,’ says Mavrellis. ‘There is a need for legal advice and, as the banks and corporates are trying to comply with all the new rules and regulations in a more stringent environment, they are also requiring more sophisticated legal advice from firms that have done international work in the past, know the proper forms of financial transactions, work within the framework of all EU treaties regulations and have good compliance.’

The country’s geographic location certainly helps it position itself as a convenient entry point into the EU. Its proximity to the Middle East also carries advantages. The Cypriot government is actively wooing new markets and it was one of the first European countries to try to build trade relations with Iran when sanctions were lifted at the start of the year (for more details, see box, ‘Funds to Iran’). Other key jurisdictions include Israel and South Africa. In 2015, a South African property company, the Atterbury Group, was behind one of the year’s largest transactions, the €180m acquisition of The Mall of Cyprus and the Mall of Engomi from the Cyprus-based Shacolas Group. Andreas Neocleous & Co advised Atterbury on the transaction and has continued to do so since it subsequently established a regional office in Cyprus.

Bad credit

The Mall of Cyprus buyout illustrates that good deals can be found for foreign investors, particularly as Cypriot companies look to clean up their balance sheets. More transactions are likely to follow in the coming year, as banks, including the Bank of Cyprus, look to restructure their loan portfolios. This restructuring work will provide a good deal of activity for lawyers, although it also serves as a reminder that Cyprus is a long way from being fully solvent.

‘Although there are a lot of encouraging figures about the economy, the one issue that remains is the NPLs,’ says Kyprianou. ‘This has generated legal work in relation to banks taking action against debtors, and also debtors who wish to renegotiate and restructure their loans with the bank.’

‘A lot of these loans are no longer recoverable, not because people are unwilling to pay, but because they are unable to pay,’ adds Stavros Pavlou, senior and managing partner at Patrikios Pavlou & Associates. ‘As a result, companies producing for the local market are severely restrained. I have a prime candidate for non-payment, which is a leading local manufacturer. It has loans that can never be repaid because its turnover has halved to what it was before the crisis.’

For the most part, lawyers report that the banks are taking a pragmatic view and litigation against bad debtors has not been as high as might have been expected.

‘The banks know that if they are too aggressive with taking people’s assets, and especially their homes, this will very easily lead to a recession of even greater magnitude,’ says Kyprianou. ‘They are showing flexibility and they know that everyone will lose something from this issue. They will give discounts and they will try to give better repayment terms.’

On a national level, these restructurings are echoed through the government’s own privatisation programme, which was among the conditions attached to the Troika bailout. So far, only the privatisation of the country’s largest port at Limassol has gone through, with the government announcing in February that a consortium led by EuroGate International (and advised by Chrysses Demetriades) had won the concession for the port’s container terminal and a consortium led by Dubai’s DP World would take over the port’s maritime services. Other targets for privatisation include the Cyprus Telecommunications Authority, the Electricity Authority of Cyprus and the government lottery, although political wrangling has delayed any progress on the first two.

Even when they do go ahead, with the exception of a small handful of law firms advising the bidders, the direct impact of the privatisations on the legal market is fairly minimal.

‘They are very specific matters,’ says Kyprianou. ‘It’s important for the law firms actually involved in the process, which are limited. I can’t say for the legal services sector as a whole that it has an impact. However, the privatisation policies, the fiscal policies, the trimming of the public sector will help the economy as a whole, and the legal sector as a consequence.’

The other prize that the Cypriot market is holding out for is the potential of its offshore natural gas fields. Any plans to fully exploit these, however, are largely beholden to the ongoing negotiations with Turkey regarding the ‘Cyprus question’ and the country’s potential reunification.

Discussions between Cyprus and Turkey resumed in 2015 and are considered to have gone well, although nothing concrete has yet to be agreed. There is also the suspicion that Turkey has become distracted by problems closer to home, including the implosion of Syria and its subsequent refugee crisis. Should a deal ever be struck, it would be a significant game-changer for the country and its lawyers, and provide a huge boost to the country’s economy. In the meantime, however, the Cypriot legal market will focus on establishing a firmer footing as a place to do business in Europe.

‘In a lot of instances, the market is what’s driving the jurisdiction and not the other way around,’ says Aristedemou. ‘The big challenge for Cyprus is how to transform itself for the new era of tax, structuring and financing and to maintain its position in the European market.’ LB

The post Cyprus: Picking up the pieces appeared first on Legal Business.

Wind back 12 months and the mood from the Cypriot legal community was undeniably improving. The island was meeting the terms of its €10bn bailout from Europe, following near economic collapse in 2013; the discovery of gas reserves offshore looked particularly favourable; and even the Turkish and Cypriot halves of the country had begun reviving stalled peace talks with the aim of once and for all reuniting the island.

Once again, though less happily this time, what a difference a year makes. Twenty four months on from the EU-imposed haircut, a feeling of pessimism has returned to Cyprus – certainly among its legal elite.

Political wrangling over proposed new legislation accelerating foreclosures on business loans and mortgages – which will enable banks to foreclose on errant borrowers more quickly and which was a condition of International Monetary Fund (IMF) funding – continues and many Cypriots are keenly frustrated by the inability to affect their own destiny.

‘People are very worried and the mood in Cyprus is one of apprehension. There are a series of events affecting Cyprus that are out of our control and there is the same helpless feeling that we had in 2013,’ admits Stavros Pavlou, senior and managing partner at Patrikios Pavlou & Associates.

Pavlou puts this down not only to the knock-on effects of the collapse and uncertainty over the foreclosure law, but also wider global events, including the Ukraine crisis and sanctions on Russia, which historically has used Cyprus as its offshore jurisdiction of choice. This issue has been compounded by the Russian government’s legislation, aimed at preventing Russian businesses from avoiding paying taxes at home.

Observes Pavlou: ‘A number of new ventures are not being undertaken, people are not spending as much because they are scared of not having any money in hard times and, while the government says that economic recovery is coming, nobody believes them.’

Reasons to be cheerful

In December, the IMF held back the expected tranche of €88m (£69m) in bailout funds to Cyprus after the island’s parliament delayed the new foreclosure law. The law is intended to make it easier for the country’s banks to start collecting on bad loans, which account for around half of all debt.

Co-publishing feature

The use of a Cyprus International Trust (CIT) as a business vehicle
– Andri Tsangarou and Andrianna Solomonides, Kinanis LLC 

However, enactment of the legislation has stalled as its finer details are thrashed out in a game of political ping pong between the country’s government and parliament.

According to Savvas Savvides, managing partner of the Paphos office of Michael Kyprianou & Co, the delay is being caused because the Cypriot parliament wants to ensure that ordinary individuals who cannot pay their mortgages will not be evicted from their homes.

‘As you can appreciate, homeless individuals and families would cause a humanitarian concern in addition to our present societal struggles. I believe that the Cyprus parliament had a good reason for suspending the foreclosure law and I am certain that the appropriate solutions will be found,’ says Savvides.

Yet until the furore erupted at the end of last year, it was Cyprus’ steadfast adherence to the terms of its rescue programme that had been attributed to the country consistently beating dour projections regarding its post-bailout economic performance.

The Cypriot economy is projected to grow 0.4% in 2015, which would bring an end to a three-year recession that has been shallower than expected.

Pavlos Aristodemou of Harneys Aristodemou Loizides Yiolitis believes the new foreclosure legislation will be passed by the government in the next few months and that this will create a new market with private international investors looking to buy up the property that the banks will try to sell. ‘Once the foreclosure legislation comes in, we will see more refinancing and local transactions dealing with direct investments,’ he asserts.

Savvides says that the legislation is also expected to generate interest from international companies interested in large commercial properties in Cyprus. ‘This modification of the market will involve new opportunities of work for lawyers,’ he comments.

And while Cyprus continues to fulfil its borrowing obligations, Cypriot lawyers are also looking forward to an expected flurry of privatisations over the next 18 months. Last March, the government finally passed a bill to privatise three state-owned utilities. It needs to raise €1.4bn (£1bn) by 2018 through privatising the Electricity Authority of Cyprus, the telecoms utility, Cyta, and the Cyprus ports authority, which manages the ports of Larnaca and Limassol, with work expected to start imminently.

However, Irene Christodoulou, partner and head of corporate at Nicosia-based firm Kinanis, says that companies looking to take advantage of the opportunities generated from the state privatisation programme are only likely to use Cypriot firms for local legal matters, such as labour law. She adds that Cypriot lawyers simply do not have the experience of advising on large-scale privatisations.

Expected to be more fruitful for domestic firms is the long-awaited casino resort bill, which lawyers hope will come into play over the next year. At the end of much debate that followed the government announcing proposals to create an integrated casino resort in Cyprus in 2013, the executive passed the bill to parliament just before Christmas 2014. Once passed, the legislation will allow for the ‘establishment, operation and monitoring’ of casinos in Cyprus.

Thirteen operators have expressed interest in the Cyprus casino project, which is expected to cost some €500m, with serious interest coming from the US, Singapore and China.

Elias Neocleous, head of corporate and commercial at Andreas Neocleous & Co, says he expects to see ‘good high-end legal work for Cypriot firms’, creating the necessary legal framework to allow casinos to open in Cyprus.

Deal-wise, 2014 was somewhat of a schizophrenic year for Cyprus, with a range of sectors from professional services to technology, financial services and the leisure industry involved in the largest M&A deals. What is noticeable is the absence of substantive local legal advice on the largest deals, with companies instead preferring to turn to international firms.

According to Mergermarket, the largest Cypriot deal of last year saw Portfolio Recovery Associates acquire Aktiv Kapital from Geveran Trading Co for £786m. Freshfields Bruckhaus Deringer, Swedish firm Gernandt & Danielsson and Norway’s Wiersholm advised Aktiv. Geveran was advised by Canadian firm Blake, Cassels & Graydon, Finland’s Dittmar & Indrenius Attorneys, US firms Fried, Frank, Harris, Shriver & Jacobson and Sidley Austin, Germany’s Gleiss Lutz, Norwegian practice Thommessen and Austria’s Wolf Theiss. No Cypriot lawyers were involved.

The most significant transaction involving a Cypriot firm saw Andreas Neocleous & Co advise Austria-based construction firm Strabag on its acquisition of the £76m stake held by the Bank of Cyprus in the JW Marriott Bucharest Grand Hotel, alongside Romanian firm Vilau & Mitel. The Bank of Cyprus was advised by Deloitte Legal.

Meanwhile, the £44m sale by Ermes Department Stores of its 50% stake in Cyprus’ airport duty-free shops to Ireland’s ARI subsidiary, CTC-ARI, saw Cypriot firm Ioannides Demetriou Law Offices advising Ermes, while ARI was represented by Irish firm Arthur Cox and Dr K Chrysostomides & Co in Nicosia.

Russian dynasties

But while there are still reasons to be optimistic about potential dealflow once certain political and economic hurdles are overcome, the reliance of the Cypriot economy on Russian investment looms large.

During the financial crisis, reports speculated that nearly half of all deposits in Cypriot banks were at their source of origin Russian, with ratings agency Moody’s putting a figure of £21bn on the amount of money Russians had saved in Cypriot banks.

The Russian government’s recent decision to bring in stringent ‘de-offshorisation’ legislation has left Russian businesses very cautious and, in turn, their Cypriot legal counsel worried about the significant and long-lasting consequences for themselves and the national economy.

The proposals will mean that Russians setting up shop outside of Russia will be subject to significantly more stringent rules governing the reporting and taxation of their foreign business ventures. Russian tax residents who have interests in controlled foreign companies where the profit is deemed taxable in Russia, will be taxed between 13% and 20%.

Pavlou admits that he is concerned about the Russian tax legislation because it is a disincentive to Russians maintaining offshore companies, of which there are some 150,000 in Cyprus. ‘We have seen a number of companies closing down because it has become too costly for them to comply with the new Russian tax regime. Those that stay are consolidating and trimming down their structures. They are withdrawing any excess companies that are not needed,’ he comments.

Heavyweight Russian companies, including metal producers Rusal and Metalloinvest MC, telecoms giant Mobile TeleSystems, electricity generator RusHydro and vehicle manufacturer Kamaz, have all said that they will play ball with their government, by either closing down their offshore entities or relocating their operations to Russia.

And despite the fact that, in the short term, the consolidation and restructuring of Russian businesses in Cyprus is creating work for Cypriot law firms, Pavlou is anxious that fewer companies will ultimately mean a reduction in clients.

‘Even in litigation, business is starting to suffer because there are fewer instructions, and I know that firms in the fiduciary business are already having to lower their fees and let people go,’ he says.

Christodoulou says there is a lot of movement with Russian holding entities being closed or restructured and consolidated, which is creating work, but de-offshorisation aside, she is particularly concerned about the impact that the Ukraine crisis will have on the island. She says while the 2013 financial crisis ultimately did not shake the trust of Russian investors in Cyprus, EU sanctions on Russia, which Cyprus must adhere to, are likely to have a more significant impact. It is an indication of just how important Russian money is to the country that most of the top-tier firms now have a dedicated sanctions team advising Russian clients.

‘We are going to be affected by the war in the Ukraine, the sanctions against Russia and the depreciation of the rouble, because all of this means that Russians are not investing or looking at opening new ventures,’ she says.

Neocleous agrees that the combination of the falling price of oil and the effect this will have on the Russian economy, sanctions, the Ukraine crisis and the de-offshorisation law could have a major impact on Cyprus and the work available for law firms.

‘Law firms that work exclusively with the Russian market or where Russian clients contribute to a lot of their work will have big, big difficulties,’ he says. ‘There will be less work from Russia and the ongoing recession in the local market will mean lawyers will have to offer services for lower fees.’

Pavlou is frank in his admission of the effect Russia’s problems are having on fees. ‘We have Russian clients asking to pay in roubles rather than euros, but we are not in the market to take on the rouble risk.’

He adds that the current value of the Russian rouble means that, for Russian clients, fees have effectively doubled over the last 18 months.

‘Clients are asking for discounts, they are shopping around and firms are having to compete heavily for business,’ Pavlou says, adding that he is willing to offer Russian clients who settle their bills promptly a ten to 15% discount on his €500 per hour rates.

For Cypriot lawyers, it appears the black dog of depression is biting again. For now it seems they will have to play the waiting game to see how macro-political factors play out between Russia and the West, with the express hope that the island is not forced to face an even bigger calamity than it did two years ago. LB

The post Return of the black dog – Hard times return for Cyprus’ legal community appeared first on Legal Business.

A year ago Cyprus was heading for disaster. The banking crisis had hit hard and predictions of where it would leave the country ranged from the sublime to the ridiculous. Hyperbolic headlines screamed that Cyprus would be forced to quit the eurozone and that everybody would be out of a job. Foreign investors would leave in droves, said the naysayers, so the island had better just go back to fishing and tourism as its mainstay.

Thankfully for the majority, and certainly for the Cyprus legal community, such prophecies have proved overdone. Depending on who you speak to there is really only a mix of cautious or, for some, more courageous optimism about where the Cypriot economy is headed and the benefits that will be realised in the next couple of years by its advisers.

Reversal of fortune

In February 2014, almost a year after Cyprus was bailed out by the European Central Bank to the tune of €10bn (£8.2bn), speculation was rife that Cyprus was set to relax stringent capital controls that have been in force to prevent a run on Cypriot banks.

In 2013 the Cypriot government negotiated with the EU to secure a deal which meant that those with savings of less than €100,000 (£85,000) had their deposits transferred to the Bank of Cyprus as the country’s second-largest bank, Laiki, was wound down. Those with savings of more than €100,000 lost a substantial chunk of their money.

Cyprus finance minister Harris Georgiades said recently there could be ‘significant relaxations of the restrictive measures’ after the island’s fiscal progress was applauded by mission heads representing its ‘Troika’ of lenders – the EU, the European Central Bank and the International Monetary Fund.

Although some restrictions have already been relaxed since the country’s near economic collapse, cash withdrawals are still limited to €300 a day and the cashing of cheques is banned, while large cash transfers also have to be vetted. In a first for a eurozone state, savers are also forbidden from breaking time deposits.

But in a sign that Cyprus is moving towards recovery, its central bank chief, Panicos Demetriades, has not ruled out all capital controls being lifted by the end of the year – if the country continues to make ‘substantive progress’ in implementing its economic reforms.

‘That is expected to happen, if all goes well, by the end of the year,’ he said in February, adding that he expected nearly all domestic controls to be removed in the next round of easing of controls.

This prognosis contrasts markedly to the bleak picture less than a year ago.

‘The contraction of the economy was only 5.5%, so not as bad as predicted; we easily passed the valuation of Troika and there has been increasing stability month-by-month,’ says Limassol-based partner Elias Neocleous, head of corporate and commercial at Andreas Neocleous & Co.

He predicts that although Cyprus will be in for another tough year this year, the economy is likely to bounce back in a more dynamic way in 2015 and will return to growth by 2016.

‘If we stick to the obligations under the loan agreement with Europe, the crisis is the best thing that could have happened to Cyprus because it means developing a modern social security and healthcare system and privatisation. The only bad thing was the bail-in,’ he says. ‘The crisis has given us an opportunity to create a much better and more dynamic business environment and focus on where we have a competitive advantage,’ he adds.

Stavros Pavlou, senior and managing partner at Patrikios Pavlou & Associates, says that the reaction in the legal market mirrors the rest of the economy. ‘It has proved to be a considerably better situation than expected but there is still a lot of anxiety and fear over what the future holds,’ he says. ‘Because of the work we are getting we have hired people, turnover has increased by 60% compared to the same period in 2013, returning to similar levels as 2012. The market has shown a considerable ability to absorb the shock of the crisis.’

Savvas Savvides, a partner at Michael Kyprianou & Co, agrees: ‘Cyprus is getting better, and better sooner than expected. I believe that with hard work and the correct strategy, everybody can get through this.’

Some firms have already done well out of the crisis, particularly international firms. Andreas Neocleous worked alongside Slaughter and May in advising the Central Bank of Cyprus on the restructuring of the banking sector and the redrafting of banking regulations, while Skadden, Arps, Slate, Meagher & Flom advised Cyprus Popular Bank in investment treaty claims against the Greek government. Offshore practice Harneys, the only global law firm to have an office in Cyprus – Harneys Aristodemou Loizides Yiolitis – also moved quickly to set up a group devoted to advising clients on the banking crisis.

However, lawyers are critical of whether capital controls and restrictions were really necessary to get Cyprus back on an even keel.

‘If Cyprus had not done the bail-in but just the restructuring, it would have already had growth in 2013 but we were not treated in the same way as our other European partners. The problems were deep but could easily have been corrected without the bail-in,’ argues Neocleous.

Cyprus Inc

There is an ingrained perception among Cypriot lawyers that the crisis, subsequent intervention by the European Union and the media’s portrayal of events has led to an image problem for the country – something that needs to be repaired as quickly as possible because the reduction in new business has been significant.

Although as yet no smaller Cypriot law firms have been forced to close – something that was feared likely last year – it is rumoured some will have to consider closure or mergers with bigger firms. Even the large practices in Cyprus are considering options to minimise the impact on their own businesses.

Pavlou admits that his firm’s plans to expand by buying neighbouring office space have also been put on hold and last summer offshore law firm Conyers Dill & Pearman blamed the closure of its Moscow office, five years after its launch, on a drop off in work from Russian investors using Cyprus as a domicile for their corporate structures.

Harneys’ Pavlos Aristodemou agrees that Cyprus is suffering from a post-crisis image problem. ‘I understand why investors would have second thoughts, but I do think it is a good time to come and invest,’ he says. ‘The government and private companies have to make a combined effort to market Cyprus, but it will take some time – it has not even been a year since the crisis.’

Neocleous feels more effort should be made to remind international investors that the island can still be an attractive place to do business.

‘The communication and marketing of Cyprus is very important. Capital restrictions, for example, only apply to old funds so anybody bringing in money now is not subject to those restrictions – we need to make people are aware of this,’ he says.

That said, work has by no means dried up. Hedge and vulture funds, for example, are circling looking for distressed funds – a trend Neocleous believes is increasing. Indeed, Cypriot sovereign bonds emerged largely unscathed from the financial crisis and a large chunk of them have been bought by international hedge funds over the last year.

A. N. Papageorghiou & Associates advised Aristo Developers and Venus Rock Estates, subsidiaries of real estate investment firm Dolphin Capital Investors, on the sale of their interest in the Venus Rock Golf Resort project in Ha Potami to China Glory National Investment for €290m. The Hong Kong-based company was advised by Hadjihannas & Co.

‘Most of our departments have had solid results and experienced marginal growth in their workload,’ says Michalis Kyriakides, head of corporate at Harris Kyriakides. ‘On the other hand, some departments, such as banking and finance, have multiplied their assignments in the last 12 months. The increase of non-performing facilities and the default of many large organisations triggered substantial litigation and our teams have handled numerous multimillion banking litigation cases, representing almost invariably the claimants’ side. Our property department also preserved its figures in 2013, mainly due to the attractive real estate prices and the governmental incentives which, to some extent, stimulated real estate deals.’

‘We have not had a serious decline in 2013 as many groups have decided to keep structures with Cypriot-registered entities,’ says Demosthenes Mavrellis, a partner at Chrysses Demetriades & Co. ‘As a result of that we have seen one Cypriot-registered company making a very successful share offering in the US as well and Cypriot companies acting as security providers in high-yield bond transactions. There has been a significant increase in litigation involving Russian interests being fought in Cypriot courts. Furthermore, the shipping industry seems to be rebounding and we see an increase in related projects. We have also been involved in various onshore projects that are relevant to the hotel and tourism section which has seen a healthy year, irrespective of the March crisis.’

Inevitably, the impact of any economic crisis on legal work is that litigation and arbitration will increase. Around 50 cases have been filed with the supreme court in Cyprus, with businesses and individuals claiming that the measures placed on investors during last year’s crisis were illegal, and around 100 cases were filed in the district courts based on tort and breach of contractual rights.

Acting on behalf of a number of small businesses in Cyprus, the UK-based Anglo-Hellenic and Cypriot Law Association has launched a class-action suit against the Troika which they are taking to the Court of Justice of the European Union.

Both Harneys and Stelios Americanos & Co have also been heavily involved in such litigation. Americanos has filed several cases before Cyprus’ supreme court challenging the legality of the government decrees that implemented the haircut.

‘There has been tremendous activity in litigation,’ admits Demetriades. ‘There have been challenges brought on the validity of the Bank of Cyprus’ order for the haircut but so far the court has dismissed them and these have failed. In the district courts there are applications to sue everyone, including the European Central Bank, which will take time to process. There are efforts being made to sue officers and employees of the banks by those who say they were tricked into buying bonds.’

However, some worry that this run of work will not sustain lawyers for the long term – the legal industry needs long-term workflows rather than quick fixes.

Gas powered

Many remain excited about the opportunities that may open up following the discovery of gas reserves in the country’s exclusive economic zone (EEZ) in 2011 and the subsequent exploration, which could mark the country’s transition from small hydrocarbons importer to substantial producer and exporter.

Thomson Reuters data shows Cypriot M&A in 2013 was dominated by oil and gas deals, accounting for 40% of all transactions and worth over €5bn in total. Russian involvement accounts for the majority of this, with investment from Russia in Cyprus’ oil and gas sector more than doubling from last year.

Russian oil giant Rosneft’s acquisition of the remaining 15% stake in oil and gas company RN Holding for €3bn was the biggest deal in Cyprus last year, which saw Harneys advising RN Holding.

Noble also completed a second stage of exploration at the Aphrodite well last September and more drilling is planned this year, with the first exploratory drilling by the ENI-KOGAS consortium due to start.

Managed efficiently, hydrocarbons could have a huge impact on the Cypriot economy. Reports suggest that there is enough gas to cater for the country for the next 180 years. Cyprus’ GDP is €17bn and one liquefaction plant is worth €10bn.

However, some lawyers are cautious about the opportunities. ‘It largely depends on what actual resources there are,’ says Aristodemou. ‘It will take a lot of time to know what the impact will be on the Cypriot economy, but if it comes to something it will be a game changer.’

And while the potential of natural resources in Cyprus is huge, Kyriakides believes that firms need to take care of their own health, regardless of the prevailing conditions. ‘I always believed that firms need to be constantly self-critical and try to get better in every aspect, regardless of the surrounding climate and regardless of whether we are living in an era of crisis or prosperity,’ he says.

Clearly, although Cyprus is still a long way from becoming a lucrative international legal market again, its lawyers continue to talk a good game. And while last year such a positive attitude could be dismissed as blind optimism in the face of crippling adversity, the signs in 2014 justify a more upbeat mindset. LB

The post Making bail – getting Cyprus back on its feet appeared first on Legal Business.

Beware the Ides of March: for two weeks earlier this year, the world held its collective breath as Cyprus teetered on the brink. What began with Cypriot banks closing their doors to prevent a run ended with recently installed president Nicos Anastasiades signing a bailout deal with the Troika that he hopes will save the country from bankruptcy.

Anastasiades walked into the crisis with his eyes open. Cyprus, which has been in dire straits following successive ratings downgrades last year, sought financial aid and support in June, and entered negotiations with the International Monetary Fund (IMF), the European Commission and the European Central Bank. However, Cyprus was unlikely to face the embarrassment of bankruptcy negotiations until its six-month tenure of the EU presidency ended last December. Inertia prevailed until the new government was elected in February, tasked with saving the nation’s economy. Not since the violent partition of the island in the mid-1970s has the country so dominated world headlines.

For Cyprus’ business leaders, including its lawyers, the E10bn eurozone bailout of its banking system leaves the nation’s long-term reputation as a global financial centre in tatters. In order to raise the outstanding E5.8bn necessary to qualify for the bailout, Laiki – the country’s second largest bank – will close, with depositors holding more than E100,000 facing huge losses. Laiki will be dissolved into a ‘bad’ bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation’s biggest lender, Bank of Cyprus. The remainder of the funding will come from tax increases and privatisations.

If all goes to plan and the economy recovers in the coming years, it has been widely reported that Cyprus will still be saddled with debt equal to 100% of its GDP by 2020. All of this leaves domestic businesses and law firms suffering more than most.

Speaking from Limassol, Elias Neocleous, partner and head of corporate and commercial at Andreas Neocleous & Co, comments: ‘The heat has been inflicted on the Cypriots – most of the pension funds are held with these two banks. International clients bank with international banks – none of which have been affected.’

He argues that if the crisis leads to an exodus of companies out of Cyprus, it should increase work for local firms. ‘There will be lots of restructurings and liquidations that will give rise to legal work,’ he says. ‘Things may seem terribly bad right now but there are also opportunities.’

Stavros Pavlou, senior and managing partner of Patrikios Pavlou & Associates, confirms he has been asked to assist Goldman Sachs, Deutsche Bank and a number of high-end institutions on issues related to the banking crisis. He has also been asked for advice from associate firms, such as Freshfields Bruckhaus Deringer and Herbert Smith Freehills in London. And it is that local knowledge which he says Cypriot firms can continue to put to good use.

Chryssafinis & Polyviou, based in Nicosia, is one of the firms advising the Bank of Cyprus. Stella Kammitsi, head of corporate, says that over the coming months all law firms should expect a lot of work in their litigation departments. She adds: ‘We are advising the bank on everything from the simple, everyday legal matters to the more complicated, such as compliance with capital restrictions requirements and insolvency ratios, in line with EU directives and guidelines, shareholders’ rights and share capital composition of the bank.’

The routine day-to-day advice includes employment and pension advice, as there may be redundancy programmes following the dissolution of Laiki Bank. Pambos Ioannides, managing director of Ioannides Demetriou, is representing the doomed Laiki on the restructuring.

Kammitsi adds that the government of Cyprus is advised by the attorney general Petros Clerides and no external firm has been officially instructed.

But recent events in the banking sector will certainly shrink the legal market, according to Anastasios Antoniou, name partner of the law firm Anastasios Antoniou LLC. ‘Cyprus has lost its credibility in terms of its tax and jurisdictional advantages, so I see a major shift in the coming weeks and months as to what [law firms] will offer,’ he says.

The comments above reflect the fear and optimism evident among the country’s firms when Legal Business asked for views on how the legal market will shape up in the short term. At its extreme, Neocleous believes some of the smaller Cypriot firms will collapse. Of the country’s 250 law firms, many of these are family-run, while 150 are small firms with just one or two lawyers.

‘We will see a major reshuffle of the legal market and small to medium-sized firms will merge or close down,’ he says. ‘You will have economies of scale in place, and a lot of clients want the comfort of dealing with a very big organisation.’

‘It’s early days but some firms might not be able to make it,’ he adds. ‘They may have to close. They have lost money in the banks, liquidity has been affected – that’s been the case with a lot of firms, including ours.’

Laying the blame

Cypriot law firms are unapologetic about blaming Cypriot banks and the previous government for the over-exposure to the Greek debt crisis that led to the country’s current woes. Certainly a nation with a banking sector seven times the size of the economy was likely to be vulnerable. The new government under Anastasiades was elected in late February with a clear mandate: to save Cyprus from insolvency. One of its first acts was to introduce capital controls that prevented depositors from leaving Cyprus for several weeks.

But Pavlou says recent measures have been just a sticking-plaster solution. ‘We need to learn to live without the large banking sector and devise structures for the client which allow them to bank wherever they feel most secure,’ he says.

‘It’s early days but some firms might not be able to make it. They may have to close.’
Elias Neocleous, Andreas Neocleous & Co

Cyprus has established itself as a hub for European professional services, such as accounting, actuarial and legal services. But this reputation is at risk, with Moody’s recently maintaining Cyprus’ junk rating, and senior credit officer Sarah Carlson was widely quoted in March as saying: ‘The system’s profile as an offshore financial centre is unlikely to survive this crisis.’

She added that the financial crisis in Cyprus ‘will have profound long-term negative consequences for the sovereign’, and that ‘the sovereign will remain at risk of default and exit from the euro area for a prolonged period’.

Neocleous says that the ‘greatest fear’ for clients is that Cyprus would leave the eurozone, but he thinks now the bailout has been agreed, it is unlikely.

Local firms have suffered the fallout from the downgrades since last summer but George Pamboridis, partner at Pamboridis, says: ‘It’s much worse this year. It’s giving a very bad name to the country as an international business centre.’

However, many remain hopeful that structural reforms will keep Cyprus out of the headlines going forward. Emilios Lemonaris of E C Lemonaris Law Office in Nicosia comments: ‘In my opinion, lawyers flourish when the economy flourishes – not during a crisis. The first professionals to sense the crisis were the lawyers.’

No firms have reported redundancies yet but many are preparing themselves for the worst. Michalis Kyriakides, partner at Larnaca-based firm Harris Kyriakides, confirms the firm has 16 lawyers and took on another two associates in 2012. ‘We did not have any redundancies and are recruiting throughout the year,’ he says.

Neocleous, who has offices in several countries, says growth is still on the cards but is tempered by a changing environment. ‘Last year we were on a recruitment spree, but now we may have to downsize, or we may have to reduce salaries or do both,’ he says. ‘Obviously we need to take steps to make sure we are above board and offer good services to clients.’

In the event of the worst-case scenario, where Cyprus reverts to becoming an agricultural or tourist backwater like Sardinia or Crete, Neocleous would not rule out leaving the island. ‘If that materialises, we may have to look for another roof or host country to service our clients,’ he says. ‘If that very extreme scenario takes place, we will have to make huge decisions.’

Unsurprisingly Cypriot law firms are experiencing pressure on fees. Existing clients are already unable to pay their bills and others are quick to ask firms for discounted rates. ‘The general economic crisis has pushed fees down, and people are now bargaining, and will push the hourly rate down,’ says Achilleas Demetriades at Lellos P. Demetriades Law Office in Nicosia. ‘Our policy is to ask for 50% of our potential fee up front.’

George Pamboridis says: ‘When clients ask your price, if you say “between E10,000 and E12,000”, you hear: “I have an offer of E5,000 – will you match that?” – and you have to say yes or no. It’s not a pleasing environment to work in.’

Positive outlook

Despite the crisis, some firms are already reporting substantial deals for 2013. Pamboridis’ most recent deal was acting alongside DLA Piper in advising Saudi-based Arabsat in the purchase of satellite unit Hellas Sat from Greek operator OTE for E208m in February. The deal is scheduled to complete in the second half of 2013.

‘Although the banking situation is in flux, the reasons why people turn to Cyprus for corporate structures remain the same.’
Pavlos Aristodemou, Harneys

‘There has been a lot of new business, not only within the banking sector but with big projects,’ he adds. ‘For instance, there’s going to be a new casino in Cyprus. Someone needs to undertake and draft new legislation to monitor the regulation of the gambling industry for the licensing and the tendering. It’s a whole new field and the government needs expertise on it.’

Fittingly, given that Cyprus was recently described by French finance minister Pierre Moscovici as having a ‘casino economy’, the newly appointed Cypriot minister for tourism, George Lakkotrypis, has asked the Cyprus Tourism Organisation to update a 2007 study it undertook on the viability of casinos in the country. According to local reports from Cyprus, the government is working on a bill that would allow the opening of casinos. Neocleous confirms that the government is going ahead with this proposal.

The financial crisis in Europe has caused an increase in the number of claims by clients against financial institutions. This has had a positive knock-on effect for law firms, and many of them expect litigation to increase over the next year. Last year Patrikios Pavlou posted record profits, according to Stavros Pavlou who comments: ‘This was mainly from fees from foreign clients instructing us on dispute resolution matters.’

However, he adds: ‘I fully expect it to be lower this year, but we have not yet encountered any clients who are considering their position in Cyprus.’

It’s unsurprising that over the past year, litigation is an area where many law firms are doing well. Ellinas at Areti Charidemou & Associates also reports strong performance in litigation. He comments: ‘The only sector that has faced some problems during the last year was banking. I would say last year was good for us as a law firm and the same I believe for professional services in general.’

Others, such as boutique firm Anastasios Antoniou, predict a shift towards specialised services. The firm has three pillars – competition, energy and intellectual property. ‘We are not broad on the practice areas, we are really narrowed down,’ says Antoniou.

Russian ire

The main challenge for law firms in Cyprus is hanging onto existing clients who have left or are planning on exiting the country as soon as possible. Many of these come from Russia – Cyprus is the largest beneficiary of Russian investment in the world and this was a major contributing factor to the size of the island’s banking sector. The vast majority of Cypriot law firms count at least 20% of their business from Russian sources.

The bailout package has left Russia furious, as depositors with Bank of Cyprus face the prospect of losing up to 60% of their savings. According to a recent briefing from Goltsblat BLP on whether depositors would be able to get their money out of the Cyprus banking system, Russians are believed to have around E20bn deposited in Cypriot banks. Well before the Cypriot banks closed their doors and capital controls came in, there were numerous reports of Russians clearing out their Cyprus accounts and loading barrels of cash onto private jets before flying off to seek more favourable climes.

Yuri Botiuk, a partner on the Russian desk at Pinsent Masons, says: ‘The effect of this will destroy Cyprus as an offshore jurisdiction for the former Soviet Union.’ He adds that claims will be made against the country and enforcement of arbitral awards could be sought against assets held by the state of Cyprus outside its own sovereign territory.

‘I’m sure there will be lots of claims – actions against the two Cypriot banks, the European Union, and the European Central Bank,’ says Neocleous. ‘These are difficult times: relationships with clients are being tested – especially with those who have lost money.’ However, he adds that none of his Russian clients have deserted the firm yet.

An exodus of Russian clients from Cyprus would also throw into doubt the new protocol to the 1998 double taxation treaty between the two countries that took effect in January. The agreement means that dividends received by Russian shareholders from Cypriot subsidiaries would not be subject to Russian corporate tax.

There are fears that Russia may yet pull out of the double taxation treaty and sever future ties with the sovereign state. Botiuk suggests some Russians believe the appointment of the current Cypriot president was an ‘integration ticket’ to bring Cyprus closer to the EU at the expense of Russia. ‘Companies and people who lose money in Russia will remember who was behind this,’ he says. ‘It is therefore a good time for the non-euro UK to roll out the red carpet for the Russians. The true beneficiaries may be the Chinese and South Koreans who compete directly with Germany to sell the heavy machinery that Russia needs.’

However, Savvas Savvides, a partner at Michael Kyprianou & Co, believes that Russian investors will still invest in Cyprus. ‘Even though they lost their faith in the banking system, Cyprus remains a country with a very low corporate tax and low income tax, so clients will not leave us,’ he says.

There are understandable fears rippling through law firms who have strong ties with Russian clients, and they are doing all they can to maintain those relationships. This includes servicing those clients even if they leave Cyprus. But, the country can turn around its fortunes quite quickly, as Ireland did, according to Harneys partner Pavlos Aristodemou. ‘Although the banking situation is in flux, the reasons why people turn to Cyprus for corporate structures remain the same,’ he says. ‘Just like Irish banks had a problem but the corporate structures remained unaffected, we believe the same shall apply here.’

Harneys, which has a 17-strong presence in Cyprus trading as Harneys Aristodemou Loizides Yiolitis, put out a Q&A on the banking crisis that stressed that an important distinction should be made between the Cypriot banking system and its corporate vehicles. It said: ‘Corporate structures are not affected by the banking crisis. Holding structures in particular which are the most popular type of Cyprus structures remain unaffected as tax on dividends and treaty extraction and withholding taxes remain unchanged. Cyprus companies may operate bank accounts out of Cyprus without implication on their tax resident status in Cyprus.’

Aristodemou comments that although migrating companies out of Cyprus is a perfectly legitimate option, it is not something the firm would encourage. ‘As a law firm, our preliminary advice to clients is not to make any decisions until the position is clear. Secondly, we are advising clients to distinguish between a banking crisis and what can happen to corporates. I would hope that other firms are doing the same.’

He adds that the initial shock should be followed by more careful examination based on tax treaties, company law and other fundamentals. ‘There is no reason for a Cypriot company to relocate when it can choose banking in a separate jurisdiction until the banking system in Cyprus is stabilised.’

Harneys is the only international law firm in Cyprus and it established a special banking practice group in late March to advise clients on the legal implications of the crisis. Based in the Cyprus office with additional members in London, Hong Kong and the BVI, the group has been advising clients on all issues related to the imposition of capital controls and bank restructuring as well as the legal position of ongoing financing and derivatives transactions, and Cyprus tax treaties.

‘The general economic crisis has pushed fees down, and people are now bargaining, and will push the hourly rate down.’
Achilleas Demetriades, Lellos P. Demetriades

Another firm, Michael Kyprianou & Co, opened an office in Malta at the end of March to service clients who require alternative options for their banking. Savvides says: ‘We opened an office to offer alternative options to corporate clients as they were really worried about the banking sector. This offers comfort to them.’

Even before Cyprus’ banking crisis escalated, the level of foreign investment in Cyprus had dropped. A multimillion-dollar deal to develop Larnaca airport with local operator Hermes was called off in January. Andreas Neocleous & Co advised on the deal, which would have included a large commercial showroom, warehouses for Chinese goods and a conference centre. Says Neocleous: ‘If you want to destroy a deal, you need to make it public and it became public well before anything concrete had been agreed or reached. That, I think, jeopardised the deal and it fell through.’

Gas relief

As regards future growth in Cyprus, Moody’s suggests ‘at some point, the exploitation of offshore gas fields is likely to make a meaningful contribution to growth, but this is unlikely to materialise over the next two to three years’. The discovery of gas reserves in the country’s exclusive economic zone (EEZ) in December 2011 could mark the country’s transition from small hydrocarbons importer to substantial producer and exporter.

The estimated reserves, with a value of up to $80bn, cover 51,000 sq km in offshore Cyprus and are divided into 13 exploration blocks. The concession for Block 12 was won by Texan giant Noble Energy, which first discovered the reserves, in the initial licensing round.

In the second round, selected bidders included Italian-Korean joint venture ENI-KOGAS (for Blocks 2 and 3), French-Russian JV Total-Novatek (Block 9) and Total (Block 11). The licences were granted in February 2013. Costas Stamatiou, shipping and admiralty partner at Andreas Neocleous & Co, says all of the initial legal work will go to large international firms, commenting: ‘In Cyprus, the legal work hasn’t started yet.’ Savvides agrees, and says: ‘This is a new sector for Cyprus.’

Cypriot firms, therefore, are keen to offer local advice to bidders or international firms as much as they can. Ioannides Demetriou represented the Republic of Cyprus in its contract with Noble. Of the 29 bidders in the second round, Chrysses Demetriades & Co advised Cyprus Opportunity Energy consortium comprising Israel Opportunity – Oil and Gas Exploration and the Norwegian operator AGR Energy. Pamboridis works with DLA Piper’s energy practice in the US and UK, offering it local support on energy ventures in the region.

Socrates Ellinas, head of corporate at Areti Charidemou & Associates, says that energy is very much a nascent practice area for Cypriot firms, and local advisers have much to learn from their international counterparts. ‘Energy is generating a lot of interest, but law firms have to be very honest with clients, foreign investors, and energy companies. The reality is that there are no experienced professionals in Cyprus in the energy sector. This is something we will develop.’

Litigator Anastasios Antoniou, who represented Marathon Oil in its unsuccessful bid to win a licence in 2012, says firms such as Andreas Neocleous & Co have the capacity to adapt and assist multinational energy companies on hydrocarbon licences because of their size. ‘We don’t have that size but are a boutique dedicated to three practice areas, one of which is oil and gas law,’ he says. ‘Firms that have a longstanding practice can adapt to energy law demand. I don’t know if smaller firms can adapt in that manner. My guess is that energy law work, emerging from hydrocarbons in Cyprus, will be a matter for the really big offices. I see a more consolidated legal services market in the future for energy.’

Legal advice on the tendering process is critical, as the exploration of the gas fields requires billions of dollars of investment before they are profitable. Although 200 billion cubic metres of gas have been estimated in the EEZ, the fate of these reserves is in the hands of the recently elected government.

Officials in Cyprus are confident that Noble can start confirmation drilling at the Aphrodite 1 well off the southern coast this summer. Although the third round of licences has not been announced yet, updates regularly appear on the energy section of the Cyprus ministry for commerce, industry and tourism website.

‘The issue right now is not the licensing of new plots, but the political decision as to where, when and how the necessary infrastructure will be put into place for the extraction of resources and their export to other countries,’ says Neocleous.

The attitude of Russian energy companies towards Cyprus investments will be one critical issue, as will the influence of Turkey. The Turkish government claims that certain plots in the EEZ fall within its territory and its intervention may lead to extensive public international law litigation, as well
as deterring would-be investors with significant Turkish business from mining Cypriot gas reserves.

With glimmers of potential amid so much uncertainty, the country’s beleaguered legal profession remains hopeful. But to most outsiders, things look like they could get a whole lot worse before they get better. LB

The post Keep Calm and Carry On – Cyprus’ lawyers face up to the worst appeared first on Legal Business.

Last year Cyprus’ legal market appeared enviously impervious to the financial crisis. Twelve months later and the Mediterranean financial hub has been hit hard by heavy exposure to the Greek debt crisis and its successive write downs.

In scenes that have been played out repeatedly across Europe – and which are deeply reminiscent of the early stages of the banking collapse in low corporate tax rival Ireland – the island’s sovereign rating has been downgraded to junk status, amid fears that the Cypriot government will be forced to prop up its toxic debt-laden banks, curtailing its access to the international debt markets.

But Cyprus is not rolling over yet. Local lawyers are moving to take advantage of a significant increase in foreign investment work as Cyprus’ government takes measures to cut red tape, including pushing through new legislation to secure its future as a pre-eminent trusts centre. With emerging markets work and energy deals on the rise, including tenders for one of the largest gas finds in years underway, firms will have to be able to respond and adapt to this market flux, but can they?

Domestic doldrums

For Cyprus’ leading law firms, which typically maintain a balance between local and foreign work, the domestic market is currently characterised by a lack of liquidity. Local banks have found themselves in desperate financial straits. Their exposure to Greek debt accounts for roughly 165% of the island’s gross domestic product (GDP). All banking assets, including foreign assets, total 925% of GDP. This has led to banks effectively cutting off new funding to a large chunk of local law firms’ clients.

‘The banking sector fall has been felt really badly by everyone, there is no liquidity in the market and banks don’t extend loans to medium or small sized companies,’ comments George Pamboridis, founding partner of Pamboridis.

The island’s sovereign rating has been downgraded to junk status, amid fears that the Cypriot government will be forced to prop up its toxic debt-laden banks, curtailing its access to the international debt markets.

The lack of liquidity has caused a dip in local instructions for the local players. At Harris Kyriakides, head of corporate Michalis Kyriakides says: ‘The lack of liquidity caused many projects to be put on hold as well as reduced the number of commercial acquisitions on a local level.’

A further local partner added: ‘We need more clients; I told one of my partners the other day to go out and find more clients.’

Existing clients are proving slow or unable to pay their bills and exerting pressure on their legal advisers to lower fees. Christos Mavrellis, company and commercial head at Chrysses Demetriades & Co, notes: ‘What we have experienced is first of all a difficulty in collecting and a pressure to cut or reduce fees.’

Firms that have typically had relaxed payment terms with trusted clients are having to tighten up those arrangements, and one local partner comments: ‘I have a client who owes me money and I told him when you pay me I’ll work for you, and he’s shouting but it’s too bad.’

‘People are really beginning to feel the squeeze,’ adds Lellos P Demetriades Law Office intellectual property partner Achilleas Demetriades.

The conveyancing market has also been hard hit, with law firms reporting that the once steady flow of business has now dropped to almost nothing.

Alexandros Tsirides, litigation and company partner at COSTAS TSIRIDES & CO, says: ‘The local market is struggling and conveyancing is dramatically down both in terms of local purchases and foreign purchases.’

A recent phenomenon, however, is the flock of Middle Eastern high-net-worth individuals who have started buying properties in Cyprus as it entitles them to a temporary residence. This is attractive should they need to escape the turmoil in their home countries.

‘We have at least two clients who want to come here and start buying up properties, which allows the owner a temporary residence permit in case they need to come here in an emergency,’ says Demetriades.

Meanwhile, the shipping industry that put Cyprus on the map before it developed as a major financial centre is also depressed. At maritime and admiralty firm Haviaras & Philippou, senior partner Andreas Haviaras’ outlook isn’t positive: ‘Suffering is a mild word. Some years ago there were 450 to 500 maritime cases before the Supreme Court, now they don’t exceed 30 to 40 a year.’

Not only is the shipping industry suffering at the hands of global markets but it is losing out to less expensive competitors such as the Suez Canal. According to Haviaras, one of the major issues for Cyprus has been the ban by Turkey on ships that fly the Cypriot flag entering its ports, leading to many ships changing flag to jurisdictions such as Malta or Gibraltar.

‘I don’t think that many ship owners with operations in the Mediterranean would like to exclude Turkish ports from the places they like to visit,’ says Haviaras.

However, a new law that has introduced sales tax incentives of up to 80% off for yacht owners in order to attract more wealthy individuals is expected to be beneficial to Cyprus shipping lawyers. According to local firm Stelios Americanos & Co, the sale of a new yacht over 24 metres long with a value of €5.8m would have been taxed at 17% – a total of €986,000 – but under the new leasing scheme (subject to criteria) payable sales taxes will be just €256,360, a saving of €729,640.

While shipping litigation may be down, firms are enjoying the counter-cyclical boost of more mainstream litigation, as investors enter into disputes over payment or terms. Haviaras notes: ‘For the last seven months we have had a lot of incoming litigation from foreign investors who have interests in Cyprus companies and have internal conflicts.’

Elsewhere Michael Chambers & Co, which set up six months ago and is led by former in-house legal consultant Michael Chambers, focuses almost exclusively on international instructions. The firm is advising on the internationally high-profile case of Louise Monaghan, who last year famously rescued her six year-old daughter May Assad Monaghan from Syria after she was abducted from Cyprus by her Syrian ex-husband Mostafa Assad. May was born in Cyprus, where her parents met but later split. Her father abducted May using a cancelled passport and Mrs Monaghan is suing the Cyprus government for poor border crossing controls. Chambers, who is advising Monaghan, says: ‘Louise Monaghan took all the necessary measures to protect her child but because the Cyprus authority hasn’t got the right checks at border crossings her husband was able to take her child.’

The firm is often contacted by foreign clients looking to sue local companies or individuals, something Chambers puts down to its name. ‘Foreigners tend to trust the name more than a local firm with a local name,’ he observes. In its short space of existence, the firm has grown to four fee-earners and is recruiting, including looking for an English solicitor.

With the squeeze well and truly on, in many markets this might trigger a wave of consolidation as firms seek to create efficiencies of scale.

‘We are looking for an English solicitor to employ because of the large amount of foreign clients we’re handling at the moment – they trust English lawyers more than Cypriots and even though they can’t litigate in Cyprus it would be good to have them to meet with the clients,’ says Chambers.

A further firm that has grown in the last few months is 80 fee-earner corporate and tax firm Kinanis. Head of the accounting and tax practice Charalambos Meivatzis says: ‘We cannot say that we have had to take any drastic measures, quite the contrary, our practice continues to grow. There has been slight hiring in our firm.

‘Opportunities exist in most sectors and practice areas. For example, there has been an increase in corporate litigation as well as in corporate liquidation and dissolution.’

Roughly 80% of the work Kinanis advises on comes from international investors who are spotting opportunities due to the market conditions in Cyprus. Meivatzis adds: ‘Despite the current state of the market, cash-rich investors find this period very attractive for new acquisitions and this has created an increase in this area of service.’

However, at least two firms are currently reporting hiring freezes, with one local partner noting: ‘We need to cut costs and there are to be no increases in salaries or bonuses.’

Redundancies are uncommon in this market but rumours are beginning to circulate. ‘Law firms are making secretaries and lawyers redundant, it’s very uncommon but it’s a sign of how bad things are,’ says another local partner.

With the squeeze well and truly on, in many markets this might trigger a wave of consolidation as firms seek to create efficiencies of scale. However, in a market where a majority of even the largest firms are run by first and second generation name partners this is said to be less likely in Cyprus.

Andreas Neocleous, founding partner of Andreas Neocleous & Co, observes: ‘You [typically] inherit your law firm from your family in your name, so it’s difficult to merge. When you get some money or your own clients you open your own offices.’

Similarly, law firms can be expected to remain wedded to the local market, despite the fact that in one leading firm a team of lawyers focusing on international litigation annually generates the same or more fee income than three similarly manned teams focusing on the domestic market.

‘I believe in keeping a certain percentage of the business at a local level,’ says Haviaras.

George Pamboridis adds: ‘If you split your business between local and international clientele it’s very difficult for depression to hit both markets in parallel and now the local market is in recession we can rely on the international markets.’

However, at COSTAS TSIRIDES & CO, where 65% of instructions come from international markets, the ambition is to seek out more overseas work. Tsirides says: ‘Our aim is to look outwards to foreign investment and the international litigation.’

One local partner adds: ‘It is always better to have international business than local. It’s more stable and they respect the services industry more than the locals and it is not so difficult to explain the value.’

Bank Bailouts and the International Markets

In March, ratings agency Moody’s downgraded Cyprus’ sovereign rating to junk and gave the island a negative outlook, leaving the doors open to further downgrades. Moody’s added: ‘Overall, the fragile market confidence in Cyprus, which has already led to a loss of access to international debt markets, is likely to continue, with a high potential for further shocks to funding conditions for the sovereign and the domestic banks.’

Alecos Markides, senior partner at second tier dispute resolution and intellectual property firm Markides, Markides & Co, says: ‘Once an economy considered a risk-free investment destination within the European Union and eurozone, attracting flows of foreign direct investments (FDIs), Cyprus is today struggling to access the financial markets for financing its public deficit and is seeking cash injections from Russia and China.’

Moody’s downgraded Cyprus’ sovereign credit rating three times last year, with the latest downgrade following that of Standard & Poor’s in January, also to junk status.

Local lawyers have inevitably felt the impact of these successive downgrades and loss of confidence in the market. ‘The fact that the banks have come to the point of being downgraded repeatedly has had a negative impact on new business coming in, especially deposits with Cyprus banks,’ comments Mavrellis.

One partner adds: ‘A lot of people I know have taken their money from Cyprus banks and put it in Barclays.’

While new business coming in has been affected, a mass exodus of funds in Cypriot companies has yet to happen. Even client uncertainty has, for the time being at least, stabilised. ‘There was an initial anxiety among clients whether their investments were safe or not but now I feel they are relaxed and we don’t see any side effects,’ says Haviaras.

Local lawyers have inevitably felt the impact of these successive downgrades and loss of confidence in the market.

While the banking crisis has had a negative knock-on effect on local instructions, there are two exceptions. Chrysses Demetriades is currently bidding alongside a London firm to win an instruction advising on a confidential rights and bonds issue. Elsewhere, Andreas Neocleous & Co is acting for the trustees of Odella Resources, the biggest shareholder in the Bank of Cyprus, including taking on a heavily involved, behind-the-scenes role in negotiations to appoint a new governor and address corporate governance issues before injecting a further lifeline of capital. Odella Resources is owned by Russia’s Dmitry Rybolovlev, who last year sat at number 79 on Forbes’ list of the world’s billionaires. Rybolovlev is a key client of the firm.

As Cyprus’ banks struggle to meet EU recapitalisation targets, local lawyers are speculating what could happen next, with one local partner commenting: ‘They [the banks] are ripe for takeover.’ However a further partner says: ‘Who would take over a bank that is practically bankrupt? It’s not only the losses, it’s the E12bn to E15bn worth of loans in Greece.’

There is an underlying confidence within the legal community that Cyprus is not destined to experience turbulence on a par with Greece or Portugal.

‘The fact is that Cyprus is a rather small, flexible economy,’ comments Kyriakides. ‘The sound banking sector, the well-established tourism industry and the quality and reputation of the service sector in Cyprus have maintained an acceptable level of economic activity on the island.’

Most of Cyprus’ lawyers are confident that the country is not on the precipice of a banking collapse. Mavrellis says: ‘I believe the most crucial issue for Cyprus now is whether the banking sector will be able to come up with a solution to the capitalisation adequacy issue.

‘We hope the banks will manage without the state interfering but whatever happens lawyers will have work.’

Cooking on Gas

Aside from the fact that the island will take over the EU presidency in the second half of 2012 – and no-one can envisage the EU president being bankrupt – there is one very good reason why Cyprus’ legal market exudes a high degree of optimism and underlying confidence in the short-term future.

Last December, Texas-headquartered oil and gas exploration company Noble Energy announced the discovery of between five and eight trillion cubic feet of gas to the south of the island, enough to satisfy the energy needs of Cyprus for 180 years and transform the island into an energy supplier.

While there was only limited interest in the first round of tendering for licences to explore the area for oil and gas, the success of Noble Energy saw a second round of bidding, opened by the government in February, far more hotly contested. EU regulation dictates that once the government has officially opened the tendering process parties have three months to submit interests and, in order to stay in the running, must purchase published information at a cost of E1m. Eighty-one companies have expressed an interest in buying the information. George Pamboridis says: ‘This demonstrates that all those who have come forward are serious partners and not people trying to fish for information.’

Pamboridis, which counts Cyprus-based EDT Offshore among its oil and gas clients, has teamed up with DLA Piper’s energy practice in both London and the US on energy ventures in the region. The firms have agreed to collaborate unless prevented by conflicts. The benefits for Pamboridis are clear, that it has access to one of the largest firms in the world, including DLA’s clients, people, know how and provision of secondments. For DLA, it is being given exposure and introductions to Pamboridis’ extensive energy contacts in the region. George Pamboridis works closely with DLA London energy and infrastructure partner Charles Morrison and DLA is funding the secondment of one of Pamboridis’ 20 lawyers to its London team, as part of an on-going agreement. George Pamboridis says: ‘We have teamed up with DLA subject to conflicts on a case by case basis.’

The relationship is highly unusual. While other firms have good relationships with one firm, they don’t have exclusive agreements.

The discovery of gas, the prospect of discovering more, and what George Pamboridis describes as ‘very good indications’ that oil will also be discovered has drawn the attention of the international community.

Firms including Chrysses Demetriades, Andreas Neocleous & Co and Harris Kyriakides have a role advising energy companies involved in the second tendering process for the oil field, while Pamboridis looks set to advise two bidders. The firm is representing a Chinese consortium with an interest in upstream exploration and midstream processing of oil and gas, as well as an Indian consortium which is hoping to submit a bid for one or more plots in the Cyprus Exclusive Economic Zone via a joint venture with a Cypriot company.

‘It [the tender process] will be a political decision. There is a criteria but at the end of the day the government of Cyprus will spread the risk,’ says Neocleous.

Certainly, the hot contention by Turkey that plots 1, 3, 4 and 5 in the Exclusive Economic Zone fall within its territorial waters promises to make the process considerably more complex and is expected to deter larger oil and gas companies, particularly those who have continuing business in Turkey. One local partner comments: ‘The government is likely to award the plot to a company that has military backing.’

The development of the new gasfield is expected to throw up numerous mandates as Cyprus sets up from scratch the infrastructure needed to see it become a major gas supplier. Here too Pamboridis has an early role advising a consortium on the development of a E10bn liquefaction plant for gas to be exported. The firm is also acting for a separate local consortium on a bid for the pipeline to join the natural gas well to the onshore plants. Harris Kyriakides has also been approached on infrastructure deals.

The discovery of gas, the prospect of discovering more, and what George Pamboridis describes as ‘very good indications’ that oil will also be discovered has drawn the attention of the international community. In addition to visits from politicians from Russia, China, France, the US and the UK, Cyprus also enjoyed a historic first visit from German Chancellor Angela Merkel last year.

The discovery looks set to change the geopolitical climate of Cyprus, although it may not be the immediate panacea to the banking crisis that some expect. Neocleous says: ‘In the next eight to ten years Cyprus will be an energy centre.’

As Cyprus and Israel further strengthen their relations following the discovery of hydrocarbon deposits in their respective exclusive economic zones, it is looking promising that Cyprus will become the new energy gateway for Europe. During a visit by Israeli President Shimon Peres last autumn, the two countries signed four bilateral agreements on renewable energy and energy efficiency, industrial research and development, telecommunications and archaeology.

Electricity and renewable energy

It is impossible to look at Cyprus’ renewable energy market without first revisiting the events of last summer, when 98 containers of explosives stored on the Evangelos Florakis naval base in Mari, Larnaca, exploded, killing 13 people and severely damaging the island’s largest power station. The station was responsible for supplying 60% of Cyprus’ electricity and, as a result of the explosion, much of the island was without power and blackouts were ordered to conserve power.

Local lawyers are unanimously scathing in their criticism that the island’s worst peacetime military incident was caused because the government allowed these explosives to be stored near to a main power station. However, in their assessment of the knock-on effect on business, and in particular the renewable energy market, they are more divided.

George Pamboridis says: ‘You would be in the middle of a closing and Cyprus would drop off the radar, with no BlackBerry or e-mail [access]. You can’t work like that and we had to have a generator shipped over from England.’

Undoubtedly the immediate disruption to business was enormous, as the country was subjected to continual blackouts. Attention is now being directed towards rebuilding the power station. Demetriades says: ‘Prices of electricity went up and instead of the government focusing on tendering for renewable energy they are rebuilding the old power station.’

‘You would be in the middle of a closing and Cyprus would drop off the radar, with no BlackBerry or e-mail [access]. You can’t work like that and we had to have a generator shipped over from England.’ – George Pamboridis, founding partner, Pamboridis

However, for Haviaras & Philippou the number of renewable energy deals has increased incrementally, including currently advising on the development of a wind project in Cyprus and advising an undisclosed Cyprus company on a solar and wind energy project in Bulgaria.

According to Haviaras, the Mari explosion has provided a boost for renewable energy deals, as the licensing process has been made easier. ‘After [Mari] the licensing became easier so as to allow entrepreneurs to bring new energy to the country,’ says Haviaras.

Negotiations are taking place over further renewable energy projects within Cyprus and Haviaras said: ‘I expect in 2012 there will be quite a lot of announcements.’

The Mari incident has also spun out further instructions as the government attempts to compensate for the shortfall of electricity in the short term. Pamboridis is representing Florida-based company APR Energy on its bid to supply the government with additional power this coming summer. The government is being advised by its internal legal department. The company is on the government’s shortlist of tenders and is involved in the final stages of negotiation. George Pamboridis says: ‘On 1 July Cyprus takes over the presidency of the EU and the last thing you want during the summit of the foreign ministers is a power failure. I don’t think it would go down very well, especially if it is 45 degrees outside.’

Emerging markets

While the energy sector is a particular focus for emerging markets companies – George Pamboridis for one is advising both an Indian and a Chinese consortium on energy bids – elsewhere firms are reporting a significant uptick in interest and instructions.

Tsirides is advising on a number of deals originating from the Middle East in the health and IT sectors, including setting up a health service in the Middle East through Cyprus holding companies. A double taxation treaty with the UAE, which was ratified in September last year and will come into effect this June, will make it easier for Cyprus-based companies to do business in the Middle East, according to Tsirides.

An EU and competition firm, meanwhile, has advised on two tax structures for Indian companies looking to use Cyprus as a tax base between England and India.

According to Emily Yiolitis, managing partner of Harneys’ Cyprus office, Aristodemou Loizides Yiolitis, the emerging markets are increasingly attracted to Cyprus. The firm has almost no domestic work, and outside of its core Russian client base, it is looking to expand into new jurisdictions to the South, East and West.

‘We are looking to grow in jurisdictions like the US, South Africa (where Cyprus again has a very good double taxation treaty) and I’m just back from China. It’s an exciting time for Cyprus and there are lots of opportunities worldwide for more use of Cyprus as a back office for international transactions and investments into Europe,’ says Yiolitis.

In 2011 the firm set up two funds for Indian clients in Cyprus and has seen an increase in interest from Polish investors. ‘We are seeing Polish interest in funds and have done one IPO of a Cyprus company on the Warsaw Stock Exchange and are now looking to list a Polish company on the London Stock Exchange. There is a hub using Cyprus generally as a gateway for doing things in other jurisdictions as a special purpose vehicle,’ says Yiolitis.

‘For China it’s growing – I wouldn’t say it occupies more than 2-3% but it is growing and we have an office in Hong Kong as a stepping stone into China,’ she adds.

Even where there is no double taxation treaty in place, Cyprus is proving popular. Yiolitis says that because of the tax neutrality of Cyprus, even where it doesn’t have a double taxation treaty, it makes an effective gateway into and out of Europe.

‘We are looking to grow in jurisdictions like the US, South Africa (where Cyprus again has a very good double taxation treaty) and I’m just back from China. It’s an exciting time for Cyprus and there are lots of opportunities worldwide.’ – Emily Yiolitis, managing Partner, Harneys, Cyprus

The business community is still digesting the government’s announcement in March this year that a Chinese company, Far Eastern Phoenix, has expressed an interest in acquiring the old Larnaca airport to convert it into a major exhibition centre for Chinese businesses, at the same time multinational conglomerate Triple Five has expressed an interest in a series of major investments in the island.

Hermes Airports, the consortium in charge of operating and managing Larnaca International Airport, and Far Eastern Phoenix have signed an agreement providing a multimillion euro investment into the construction of exhibition showrooms and a logistical services centre at the old Larnaca airport building. Far Eastern Phoenix plans to develop a large commercial showroom for Chinese products and a logistics centre. The project will include exhibition areas and a conference centre. It is contemplated that the investment will accommodate around 3,000 companies. Expectations among the business community are that the project will set Cyprus firmly as a gateway for Chinese products to Europe, the Middle East and Africa, as businesses interested in Chinese products and business avoid the inconvenience of having to travel to China.

‘The investment is expected to rejuvenate the surrounding region and provide dozens of new workplaces for Cypriots and foreigners. The old Larnaca Airport premises will be leased for a concession period of not less than 19 years, although an extension of the lease may be possible upon approval by the Cyprus government,’ says Demetriades.

Local lawyers are inevitably alive to the opportunities. Tsirides says: ‘China is an area where Cyprus seems to be managing to attract potential investors. I plan to go out to China in May to introduce Cyprus and explain the advantages.’

Triple Five, meanwhile, is said to be looking at investing in the banking, energy and tourism sectors. The group’s activities include the global development, management and ownership of ventures in fields including shopping centres, tourism projects, municipal planning and development, and oil and gas projects. According to its own literature the group also owns and operates over 1,000 producing wells.

The business community is sitting up and taking note, one partner at a local firm comments: ‘We would definitely hope to have a role.’

But not all are optimistic that the investment will come through. Tsirides enters a cautionary note: ‘There was a lot of talk with Qatar two years ago and nothing happened.’

Russian Politics

When it comes to business with Russia, other countries may be chasing Russian business but Cyprus’ position as its primary international partner appears assured.

The Protocol to the 1998 Double Tax Agreement between Cyprus and Russia was finally ratified by Cyprus in September 2011 and the remaining steps are expected to be completed by the end of this year, meaning that the protocol will come into effect on 1 January 2013.

The ratification is being interpreted as a further step on the road to Cyprus being removed by Russian authorities from their ‘blacklist’ of offshore jurisdictions, allowing dividends received by Russian companies from subsidiaries in Cyprus to qualify for the Russian dividend participation on exemption. This means a 0% tax applying on dividends received in Russia, expected to further enhance the attractiveness of Cyprus as a holding jurisdiction for Russian investors.

Mavrellis comments: ‘It has created a certainty as to whether it is going to happen and removes any fears that there could be a cancellation of the treaty.’

‘Russian work is still a big part of our business, not only in the corporate sector but a lot of international litigation is accounted for by Russian clients.’ – Alexandros Tsirides, litigation and company partner at COSTAS TSIRIDES & CO

The latest statistics from the Central Bank of Russia reveal that Cyprus has remained the single largest beneficiary of Russian investment in the world, irrespective of the ratification of the treaty between the two countries. However, the level of investment has been increasing. In 2008 FDI was at an all-time low of $8.8bn, increasing to $9.7bn in 2009, $18bn in 2010 and last year reaching $18.2bn. To put that in perspective, FDI from Russia into the UK was $3.9bn in 2008, decreasing to $2bn in 2009 and $1.2bn in 2010, before seeing a marginal increase to $1.3bn last year. To the US, meanwhile, Russian FDI was $7.3bn in 2008 but fell dramatically over the same period and last year was just $1.1bn.

It is unsurprising that the vast majority of Cyprus law firms count at least 20% of their instructions from Russian sources, and for many it is considerably more than that. Tsirides says: ‘Russian work is still a big part of our business, not only in the corporate sector but a lot of international litigation is accounted for by Russian clients.’

According to Yiolitis, the confidential nature of many Russian business people means that they prefer doing business in Cyprus than on their home soil. ‘We did some market research on setting up in Moscow but we found out that most of our Russian clients prefer to deal with offshore firms. From a point of view of practicality they prefer to deal with one based in Cyprus than in Moscow,’ she says.

The double taxation treaty will introduce an important change in tax treatment of the sale of shares in a company of one country, where that company has more than 50% of its immovable property in the other country. In that case the country where the property is situated will also have taxing rights on the gain. It is not known what impact this change will have on business with Russia. It conforms with the Organisation for Economic Co-operation and Development  (OECD) model on taxation and Cyprus should at least be on a level playing field if Russia makes good on its undertaking to amend all other treaties with countries regarded as investors in Russia so as to adopt the same OECD model.

Offshore interests

Meanwhile, Harneys is looking to expand in Cyprus. Currently totalling 15 fee-earners, including four partners – which Yiolitis points out is a sizeable offering in Cyprus terms – the firm increased its numbers in February with the transfer of Harneys senior BVI-qualified regulatory lawyer Aki Corsoni-Husain.

The office, which provides banking, finance, corporate, commercial and tax law, is looking to hire two to three further fee-earners this year and is moving into larger premises to accommodate its expanding size.

‘We had a big increase in work last year and we don’t have any more space,’ says Yiolitis.

The transfer by Corsoni-Husain to Cyprus may go some way to answering critics who say there is little cross-atlantic interaction between Harneys’ BVI, Cayman and Anguilla offices and Cyprus. Yiolitis says the office does get a lot of work from the other Harneys offices and vice versa: ‘We find it very successful.’ The move will enable the firm to provide advice on BVI funds in Cyprus, overcoming the challenges of the time difference between the two – the BVIs start the day seven hours later than Limassol.

‘Our main focus on Cyprus is in transactions which involve a Russia or BVI component, so primarily for Russian and BVI work.’ – John Collis, chairman, Antis Triantafyllides

Harneys’ Cyprus office also receives its instructions largely from the UK’s Magic Circle firms, particularly Allen & Overy. This has changed little, Yiolitis says, since Aristodemou Loizides Yiolitis’s tie-up with Harneys. Yiolitis is convinced that none of the large UK firms would be interested in setting up shop on the island: ‘I think Cyprus acts as a back office and I’m not sure there would be enough work for a London firm to set up in Cyprus and do what they traditionally do in London or Moscow or any other big financial centre, particularly in view of the fact that Cyprus costs are generally much lower so to have a relocation [of a top UK or US firm] would not make sense at this time.’

However, the establishment of a local presence by rival offshore firms is another matter altogether. Rumours abound of offshore firms in talks to set up ‘best friends’ relationships or enter into mergers with Cypriot firms.

‘There have been rumours about various offshore firms approaching local firms for mergers or “best friends” agreements and I’m sure some are in place and maybe we just haven’t heard about them yet,’ Yiolitis says. ‘But I do expect developments in this area because Cyprus is really used a lot for offshore structures and it does make sense for the offshore firms to move here.’

At Conyers Dill & Pearman, which has a ‘best friends’ relationship with top tier Cyprus firm Antis Triantafyllides & Sons, chairman John Collis says: ‘Cyprus is a very important jurisdiction, and our clients encounter it regularly. However, our main focus on Cyprus is in transactions which involve a Russia or BVI component, so primarily for Russian and BVI work.’

Arbitration Centre

Neocleous hopes that a further draw to the international community will be the arbitration centre in Limassol he has put his name and collateral behind. It will be registered and have its secretariat and accommodation formalised before the end of the year.

The credentials of the individuals heading the arbitration centre are impeccable: its chairman is former UN Secretary-General and Egyptian diplomat Boutros Boutros-Ghali; its vice chairman is the ex-Cypriot president Georgios Vasos Vassiliou; Neocleous himself is the secretary.

The centre will be divided into an arbitration and mediation department, each with its own panel and council, and leading mediator, Quadrant Chambers barrister Michel Kallipetis QC, is already a confirmed council member. As its third limb, the centre is in the process of identifying an educational institute that it will be affiliated with for the further education and training of arbitrators and mediators.

According to Neocleous, the centre, which has adopted the United Nations Commission on International Trade Law rules, will undertake international arbitrations and mediations, including interstate border disputes.

‘We have observed penetration in the market by some non-organised people who have nothing to do with the profession and we would like to have them regulated so we know they will not bring a bad reputation to Cyprus.’ – Christos Mavrellis, company and commercial head at Chrysses Demetriades & Co

Neocleous is convinced there is a gap in the arbitration centre map that only Cyprus can fill, commenting: ‘In between London and Singapore, there is nothing else. We have to cover this gap. Why us? Because we are the only Anglo Saxon system and an international business centre. And because I think we can do it and we have the determination.’

Increased regulation

The government is being urged to introduce facilitative legislation and the legal profession is welcoming of new initiatives and entrants, but when it comes to fiduciary services the profession is currently demanding that the government crack down on unregulated service providers which risk bringing the island into disrepute.

The fiduciary services industry is currently unregulated in Cyprus, with the exception of law firms, which are regulated by the Bar Council. Neocleous says: ‘We have to protect only people regulated by the authorities.’

The domestic downturn has exacerbated the situation and the number of cases of malpractice is on the rise.

Mavrellis says: ‘We have observed penetration in the market by some non-organised people who have nothing to do with the profession and we would like to have them regulated so we know they will not bring a bad reputation to Cyprus.’

The Trustee Regulation Bill is currently on its eighth reading, with little progress being made as it meets resistance from fiduciaries, accountants and even the Cyprus Bar Association. Lawyers and the Association alike argue that they are already regulated to advise, however Neocleous says: ‘We are regulated for legal work. This is not legal work. It’s an important part of the business but it’s not law.’

A further sticking point is which entity will act as the regulatory body and the supervising force behind the Bill.

Outward expansion

As Cyprus’ leading law firms increasingly engage with the outside world there are still very few to have made the transition into foreign markets. Of the top tier banking and finance and corporate firms, a number have a presence in Athens but no further afield. However, the minority that have made the move are expanding.

Andreas Neocleous & Co has offices in Russia, Ukraine, Prague, Budapest and Brussels and is closely eyeing the emerging markets, including currently considering setting up an office in Qatar. In the Ukraine, Neocleous has ambitions to become a leading law firm and the local office is deliberately carving out a name as a local firm with only a representative Cyprus office to avoid being labelled as just doing offshore work.

There is also a significant difference between the firm’s strategy for Western and Eastern Europe, where Andreas Neocleous & Co last year bought boutique Greek firm GS Kostakopoulos & Associates in Brussels. The new operation will serve the purpose of keeping an eye on the political capital of Europe, staffed initially by only three to four people and eventually only around one lawyer. Neocleous says the firm has no intention of practising local law in the region, or indeed in Western Europe, where clients are generally so well served.

Local lawyers know they have to do much to improve their laws and crack down on bureaucracy if they want to compete with financial centres at the highest level.

At Pamboridis, meanwhile, the firm last year announced its intention to launch in London and at the beginning of March this year the Mayfair office officially opened with one fee-earner. The office has been set up to accommodate Pamboridis’ existing London contacts, particularly DLA Piper, but also to target high-net-worth Russian and Ukrainian investors and introduce the London market to the more complex services offered by its fiduciary arm Prudens Group. The ambition is to expand the office to around three or four fee-earners.

George Pamboridis says: ‘More sophisticated high-net-worth individuals want to use Cyprus and they are not just going to need a shell to buy a house.’

As Cyprus continues to fight for global recognition, local lawyers know they have to do much to improve their laws and crack down on bureaucracy if they want to compete with financial centres at the highest level. So too will much of Cyprus’ immediate success depend on the success of its banks to recapitalise and successfully implement austerity measures to bring finances back under control.

The island’s presidential campaign began in March and elections will take place in February 2013. Between fighting for a term in office, staving off a banking crisis and acting as president of the EU, one wonders how much time the government will have to push ahead with other initiatives.

However the wheels have already been set in motion on a number of groundbreaking developments, and backed by the ambition and determination of this small island, 2012 promises to be a year full of opportunity. LB

caroline.hill@chillmedia.co.uk

The post Cyprus – Problem Plays appeared first on Legal Business.

Improved relations with Russia and accession to the European Union are helping to transform Cyprus as a financial hub. LB looks at the impact on the local legal community.

Cyprus is fast approaching a tipping point in its international development. It may be an island of less than one million people, with a total of 2,000 lawyers, but its strengthening trade ties with Russia and the emerging markets, not to mention its accession to the European Union and some shrewd domestic legislative developments, have helped the country grow its profile in the international financial arena.

With its 10% corporate tax rate, double taxation treaties with almost 50 countries and its close resemblance to the English common law system, it is unsurprising that Cyprus is also fast becoming a stepping stone for investors from China, India and the Middle East looking to invest in Europe. Local lawyers are almost evangelical about the country’s prospects, convinced that, with a more concerted marketing effort, there is no reason why Cyprus cannot become a low-tax centre of choice in Europe, overtaking the likes of Luxembourg and Malta.

‘Cyprus hasn’t marketed itself, it has given the impression that it’s experimenting and not here to stay.’
George Pamboridis, Pamboridis

Patrikios Pavlou & Co senior and managing partner Stavros Pavlou says: ‘Cyprus is simply more and more recognised as a legitimate destination from which to do proper tax planning when you’re setting up any venture in Europe or Eastern Europe, and now also in relation to work coming from India and China.’

Cyprus has expanded from its solid and respected shipping business based largely in Limassol. Its accession to the EU in 2004 and its adherence ever since to Europe’s tough ‘know your client’ regulations has transformed the country into a legitimate and stable centre for serious investors, particularly at a time when most funds are distancing themselves from the more opaque offshore locations.

The country has undoubtedly lost some of its traditional shipping business – it went from number three to number six in the world shipping tonnage list shortly after implementing EU regulations. However, most lawyers in the market seem to agree that the payoff has been worth it. ‘This shows how seriously the Cypriot government and people have taken knowing and checking on their clients,’ George Apostolou, managing partner of Apostolou & Co LLC, says of the country’s adherence to EU rules. For every piece of business lost, Cyprus is winning overseas investors and deals. And perhaps most significantly, its position as Russia’s primary trading partner looks secure.

Look east

In October 2010 Russia’s President Dmitry Medvedev visited Cyprus to sign a protocol to the countries’ double taxation agreement. The protocol allows for the extensive exchange of tax information and removes Cyprus from the notorious Russian ‘blacklist’ of jurisdictions that do not demonstrate a sufficient level of co-operation with the Russian tax authorities.

‘Cyprus is more and more recognised as a legitimate destination from which to do proper tax planning.’
Stavros Pavlou, Patrikios Pavlou & Co

Being on that blacklist has not exactly harmed Cyprus’s relationship with Russia. Russia has been a long-term business partner for most top Cyprus law firms, and for most top law firms, at least 50% of their international work has a Russian element. Cyprus is by far the biggest source of foreign investment in Russia, accounting for $53.8bn (£33.1bn) of the $262.6bn of foreign investment since the fall of the Soviet Union, and the biggest destination for Russian money, receiving $16.6bn (£10.2bn) since 1991.

Perhaps unsurprisingly given these statistics, local lawyers are divided on the significance of Cyprus’s removal from the blacklist. ‘Lifting the blacklist further put the minds of people at rest, but people were taking a calculated risk and using Cyprus in any event,’ Pavlou comments.

However, for many, including Stelios Triantafyllides, partner at top-tier firm Antis Triantafyllides & Sons, the move is the most important event of the past 12 months. ‘This is expected to enhance the appeal of Cyprus to people investing in Russia and, in turn, will translate to more work for Cypriot law firms in general,’ he insists.

Certainly the reaffirmation of the double taxation treaty is viewed by many as a critical step in securing Cyprus’ future as the best location for investment into the Russian market. Christos Mavrellis, head of the company and commercial department at top-tier firm Chrysses Demetriades & Co, says: ‘During the last three years there was a lot of gossip about whether [the double taxation treaty] would remain in operation or even be cancelled. The fact that during President Medvedev’s visit a new protocol of the treaty was agreed puts Cyprus in the best place for setting up holding vehicles for Russian companies and has brought Cyprus back to market as an advantageous location for business.’ Firms including N. Pirilides & Associates, where 100% of its international work is Russian, already report an uptick in work, particularly in tax planning, since the treaty was signed.

At both COSTAS TSIRIDES & CO and Michael Kyprianou & Co, meanwhile, Russian business accounts for around 65% of international work and both firms claim to have seen an increase in volume as a result of the protocol. They also expect further increases in the near future.

‘During the Russian President’s visit, 13 agreements have been signed, aimed at boosting bilateral commerce, investment and tourism, including a key accord abolishing double taxation between the two countries,’ says Lambros Soteriou, a partner at Michael Kyprianou. ‘This has already positively affected our law firm and we are dealing with a more significant number of Russian clients that are actively investing in and are instructing us to represent their legal interests in both business and private matters,’ he adds.

As Russia pulls out of recession, the locals hope that Cyprus will again see the return of large deals and an increase in company incorporations – which were down by around 50% in 2009 according to one estimate. Some large-scale mandates have certainly started to return. Last summer, for instance, leading Cyprus firm Andreas Neocleous & Co advised Madura Holding Ltd, alongside Linklaters’ Moscow office, on the sale of a 53.2% stake in the Uralkali fertiliser company to investment vehicles Kaliha Finance, Aerellia Investments and Becounioco Holdings, beneficially owned by Russian billionaires Suleiman Kerimov, Alexander Nesis and Filaret Galchev respectively. The deal was valued at €4.3bn (£3.7bn).

Meanwhile last September, Haviaras & Philippou brought an injunction freezing billions of dollars of offshore holdings held by Kerimov, amidst allegations that he and the Moscow mayor and his billionaire wife had swindled the applicant out of a stake in a landmark Moscow hotel. The lawsuit, brought on behalf of Russian legislator Ashot Yegiazaryan and his partners, blocked Kerimov’s Denoro Investments Ltd and other holding companies, including billion-dollar stakes in gold mining company Polyus Gold as well as Uralkali, from undertaking certain transactions. The freeze was revoked in February, although the applicant has indicated he may appeal the decision. Denoro was represented by Akin Gump Strauss Hauer & Feld Geneva partner Michael Stepek.

Many Russian deals on the face of it have no Cyprus involvement, but the likelihood that large Russian companies incorporate Cyprus holding companies means local law firms often win roles behind the scenes. Last year, when White & Case advised Russian dairy company Unimilk on its €1.5bn (£1.2bn) merger with the local arm of French foods company Danone, Antis Triantafyllides was on hand to advise Unimilk on Cyprus issues.

Emerging Markets

Russia is not the only BRIC market that has turned its attention on Cyprus. Both China and India are party to double taxation treaties with Cyprus and, while China has historically fostered ties with Hong Kong and India with Mauritius, both countries are now said to be looking for a competitive foothold to access European and the Middle Eastern markets.

‘The legal basis for funds work is only just being created now. We think that funds will be a very important area in the years to come.’
Pavlos Aristodemou, Harneys

As in other parts of the world, such as Africa, Chinese investors are also reported to be showing an interest in Cyprus’s fledgling energy market. In October 2010 the first wind farm, Orites, became operational, with Norton Rose advising the lenders alongside Ioannides Demetriou and Hunton & Williams acting for the borrower on English law alongside Antis Triantafyllides.

However, when it comes to targeting emerging markets work, for many top law firms in Cyprus their small partner numbers, lack of resources and the sheer distance to these markets mean that they are still a world apart. ‘If you ask anyone here if they have even been to China I’m sure they will say no,’ says one local partner. Many firms do report an uptick in emerging market work, including COSTAS TSIRIDES and Michael Kyprianou, where Soteriou says: ‘We have increasingly seen more work coming our way from the Chinese and Indian markets, especially in the field of direct investment and financing.’

However, few can point to many solid instructions and even Pavlou, who is currently advising on a Chinese energy investment deal being structured through Cyprus and involving tens of holding companies, admits that it can be a struggle to actively target new mandates. ‘It’s a question of finding the time to concentrate on that market,’ he says. ‘You have to understand that this is a country where very few firms get the very big deals and those firms are already up to their eyeballs in new deals. It’s not always easy to commit resources.’

At a high level, Cyprus is rising to meet growing Chinese interest, including moves by the Cyprus Investment Promotion Agency – of which Mavrellis is vice-chairman of the board of directors – to set up an office in Beijing. Meanwhile, Andreas Neocleous & Co is capitalising on its position as by far the largest law firm in the region by capturing a good proportion of emerging markets work. The firm is currently advising a large Chinese client on a project in Kazakhstan. ‘Just today I saw four to five big Chinese companies and discussed how they will open a base in Cyprus in order to break into Europe,’ remarks Andreas Neocleous.

As Chinese investors extend their reach further into Europe, it is anticipated that more Cyprus law firms will capture their business, as local partners are optimistic that they will be persuaded of the competitive benefits of using Cyprus. Michalis Kyriakides, a partner at Harris Kyriakides says: ‘They are trying to use companies in Luxembourg and, when they do, Cyprus will immediately be a candidate; it’s cheaper, has better administration, it’s far more protective for the client and it is in the European Union as well. So I believe it is just a matter of time.’

Similarly, local lawyers anticipate that instructions from India will increase, as Mauritius loses ground to a jurisdiction far more convenient for Europe. Many top-tier firms report an increase in Indian deals, including offshore practice Harneys, which recently advised a large fund on the acquisition of shares in a Mumbai-listed company through a Cyprus structure.

The official statistics on foreign direct investment into India reveal that there is still some way to go before Cyprus becomes a real competitor to Mauritius. The latter accounted for 42% of foreign investment between April 2000 and September 2010 as opposed to just 4% from Cyprus in the same period. However interest is clearly growing, with investment from Cyprus amounting to $7.7bn (£4.8bn) between April 2009 and March 2010, up 28% from $6bn (£3.7bn) on the year before.

The big question remains, if and when these markets do come looking for Cyprus advice, will the local Cyprus firms have the capacity to service them? ‘Once deals start coming out, we will be hard pressed to serve the interests of that market,’ Pavlou says of the Chinese market. ‘It’s hard to satisfy the needs of the CIS market and even people without qualifications are taking a piece of the pie.’

The trend is away from family-run general practices, with a growing number of Cyprus lawyers returning from training in the UK or elsewhere in Europe to set up corporate and commercial boutiques such as Apostolou & Co. In February this year Pamboridis announced the hire of three new lawyers, Christoforos Pericleous, Loucas Andreas Mavrocordatos and Maria Economou, all of whom studied law in the UK. ‘Success and good service brings more business and a lot of young lawyers are coming now with very good qualifications from English institutions and good training with City law firms,’ Andreas Neocleous says. ‘I believe they will attract more work and bigger firms will appear in the legal scenery.’

Funds and Offshore Firms

Aside from the question of resources measures are clearly being taken to ensure that Cyprus is ready for the next stage of its international development. Changes have been made to the local tax regime to make Cyprus more attractive for collective investment, particularly the relocation of and establishment of funds.

‘I don’t think [reunification] is close but when it does happen, it will be a huge impetus to business and development.’
Michalis Kyriakides, Harris Kyriakides

Regulation has already been simplified, including waiving the need to ask for court approval for a reduction in share capital, smoothing the path for mutual funds with a variable share capital. The government is also in the final stages of passing a domestic law implementing EU Directive 2009/65, to co-ordinate the laws and regulations relating to collective investments in transferable securities. Cyprus’s interpretation, local lawyers maintain, incorporates the best and most flexible funds legislation from across the world – and betters it.

With a new era in mutual funds predicted to attract serious investors, firms are already positioning themselves to capture new work, including funds giant Harneys. The firm’s Cyprus managing partner Pavlos Aristodemou comments: ‘We intend to do more funds work but the legal basis for funds work is only just being created now. We think that funds will be a very important area in the years to come.’

According to Aristodemou there is strong potential for Cyprus to compete with the best of the funds jurisdictions, capitalising on its low tax rate, the fact that it follows the common law system and that fees are lower than in continental Europe. ‘I think that Cyprus as a jurisdiction has certain advantages over others and if it manages to put the right legal framework supported by an efficient securities exchange commission it has nothing to fear from Luxembourg, Malta and Ireland and can be a competitor,’ he says.

Harneys’ arrival on the island, along with offshore rival Conyers Dill & Pearman, which has entered into a best friends relationship with Antis Triantafyllides, has inevitably sparked questions within the legal community as to whether more offshore firms will follow. Conyers announced its new tie-up towards the end of 2009, including plans to launch a Cypriot practice out of its Moscow office, and in 2010 Antis Triantafyllides associate Iakovos Panagi moved across to offer Cyprus law corporate and commercial advice from the Russian base. Appleby’s Bermuda managing partner Shaun Morris, meanwhile, admits that Cyprus is on the firm’s radar. ‘Cyprus is becoming increasingly prominent as a financial centre and is therefore an attractive proposition for offshore law firms,’ he says. ‘Appleby is an ambitious and opportunistic firm and we will continue to review our strategic growth options, which includes, among other jurisdictions, Cyprus.’

Harneys, meanwhile, has yet to relocate any partners to its new Cypriot base, sparking criticism among some in the market that the merger is just a marketing tool. However, according to Aristodemou, discussions are taking place that are expected to see a small number of partners move across to offer BVI and Cayman advice out of Cyprus.

Onshore Firms

Most leading lawyers in Cyprus are sceptical that the international, onshore firms will look to enter the market. For one thing, from the local perspective, hooking up with a foreign firm would most likely mean a dramatic drop off in referral work.

There is, however, a difference between the prevailing opinion in the market and what is rumoured to be going on behind closed doors. According to several local lawyers, a number of UK firms have shown some interest in merging with Cyprus firms.

One Cyprus firm currently in talks with a top-ten UK law firm is N. Pirilides & Associates. According to chairman Neofytos Pirilides, talks began in December last year and, at the time of writing, were ‘half way there’.

‘There are obstacles to overcome but we are optimistic that the talks will reach a positive conclusion,’ he says.

Top UK firms particularly active in the region include Freshfields Bruckhaus Deringer and Hogan Lovells. DLA Piper, meanwhile, has a non-exclusive association with Pamboridis, under which the Cyprus firm receives the lion’s share of DLA’s Cyprus business and has some access to its know-how.

Despite Cyprus’s limited size, there are obvious benefits for any UK firm interested in setting up a local presence. For one, the country’s ties with Russia and growing business with other emerging markets. Recent changes to domestic legislation, meanwhile, are expected to further facilitate international deals. A new provision now enables Cyprus companies operating abroad to keep a register of shares and members in that country and a mirror register in Cyprus; a requirement for overseas listing. The move facilitated the $600m (£371m) Hong Kong Stock Exchange listing of Strikeforce Mining and Resources in May 2010, becoming the first of its kind in Cyprus. The changes largely came about under pressure from Strikeforce, represented by Patrikios Pavlou & Co, which originally wanted to list in 2008. Pavlou said: ‘We did everything except list and then the crisis hit.’

Cyprus is also being used considerably more in aid of arbitration proceedings abroad. Thanks to the implementation of EU directive 44/2001, even where Cyprus has no jurisdiction, claimants can obtain freezing orders and injunctions as long as an action has started elsewhere and they can show some connection with Cyprus.

Plans are also underway to establish a heavyweight arbitration centre, with former UN Secretary-General Boutros Boutros-Ghali, ex-President of Cyprus George Vassiliou and top mediator Michel Kallipetis QC all signed up to help develop it. For intellectual property lawyers, meanwhile, there are opportunities to use tax-efficient Cyprus holding companies to license out trademarks and patents and receive royalties. Achilleas Demetriades of Lellos P. Demetriades Law Office says: ‘In addition to corporate services, Cyprus can also be a hub for holding companies to license out their intellectual property rights. IP is probably one’s biggest asset but not many people realise it.’

Nonetheless, many partners argue that local fee pressures will put off UK firms, several of which, such as Linklaters and Clifford Chance, have pulled out of unprofitable centres in Eastern Europe. ‘The big firms are looking – they are always doing a cost-benefit analysis between outsourcing and having it as their own headache, but for the moment outsourcing seems to be the preferred solution,’ Pavlou explains.

However, Pirilides points to the long-term presence of all of the ‘big four’ accounting firms on the island as evidence that the market can sustain a reasonable level of fees. Furthermore, one partner at a large firm of accountants in Cyprus agrees that there is a compelling case for the large firms to set up on the island. ‘My understanding is that law firms in Cyprus have been highly profitable,’ he says. ‘I do not believe that this is the reason big firms have not established in Cyprus.’

Instead, outsiders and partners alike point to other deal breakers, in particular the strong familial relationships in even the largest of Cyprus’s law firms and their reluctance to relinquish their independence and profits.

Apostolou says: ‘Most law firms are small to medium-sized and only a few are very large by Cyprus standards, so the bargaining power might not be balanced for the Cyprus firms to get what they would really like to have.’

Fiduciary Services

A further potential complication for any international firm interested in setting up a presence in the region via a merger is said by some to be the significant proportion of fiduciary services and company administration still done by the majority of Cyprus firms.

Certainly when it came to Harneys’ merger, Aristodemou claims that one of the reasons that the merger with his firm went through (from a purely procedural point of view) was the fact that it used an entirely independent entity to administer companies.

Other partners have been swift to play this down, claiming that a transfer of ownership and liability would be relatively straightforward. However, they also point to the fact that most established law firms already run their services through an affiliate arm, partly because these largely commoditised businesses are perceived to have a higher reputational risk than mainstream corporate and commercial law. Apostolou says: ‘I think everybody in Cyprus has separated out the business because of the risks involved.’

Aside from the risks, there is a visible trend among younger, corporate and commercial boutique firms to distance themselves from the fiduciary services that put Cyprus on the map in the 1970s led by long-established top-tier firms.

Pamboridis spun off its fiduciary business in a 50/50 joint venture with one of the major services companies in Cyprus. George Pamboridis explains: ‘People confuse a fiduciary business with a legal business and I didn’t want to do that.’

The temptation for any law firm is obvious; it remains a highly lucrative business. Pamboridis comments: ‘The trouble is, it’s easy money and you see the figures in your bank account going up but that’s not what I wanted our firm to be.’

However, a further question mark hangs over how much longer fiduciary services will continue to be easy money if the dedicated professional services companies setting up on the island make significant inroads into the market. Providers are offering corporate set ups and tax planning under one roof and, as has been seen when it comes to largely commoditised services across all jurisdictions, they are offering the service at cut price. While some lawyers argue that their model is flawed and unsustainable, professional services companies are undoubtedly multiplying on the island and are already stripping a proportion of company administration work away from local law firms.

While this may be perceived as a threat or at least a challenge by some, for those distancing themselves from commoditised work, the increased competition is a positive development. Aristodemou says: ‘It will bring up the standard of legal services work and Cyprus does not have a good reputation when it comes to legal services.’

Changes to the Current Tax Regime

The spectre of a threat to Cyprus’s fiduciary business and legal services alike arose in February this year after the New York Times reported that, according to a leaked German working paper, the country wants to establish German-specified Europe-wide standards on a variety of issues, including corporate taxes.

Cyprus has been engaging in EU talks to harmonise tax computation and ministers close to the talks played down the likelihood of any hidden agenda, but acknowledged that any move to harmonise tax rates across the Union would undoubtedly have a negative impact on Cyprus’s ability to attract foreign business.

According to local paper the Cyprus Mail, the government said at the beginning of March that it would not accept any EU changes to its corporate tax rate, and minister of commerce, industry and tourism Antonis Paschalides was quoted as saying: ‘We support the positive business climate in Cyprus and we try to improve it. A helpful factor is the low tax rate and both Cyprus and other countries will not accept changes that will undermine this.’

In the Cyprus Weekly, meanwhile, finance minister Charilaos Stavrakis was quoted going one step further in saying that Cyprus would veto any moves to unify corporate tax rates. ‘The service sector and low tax is an issue of survival for Cyprus and its economy,’ he said.

At the opposite end of the spectrum, Cyprus’s international tax standing received a significant boost last year when the EU approved a new regime under which maritime transport companies can opt to be taxed based on the net tonnage of their fleet rather than the profits of their activities. The Cyprus maritime industry is the tenth largest worldwide and the new regime, which sees Cyprus become the only country with an EU-approved tonnage tax regime for shipping activities that confers total exemption from income tax, looks set to seal or improve upon that position.

Costas Stamatiou at Andreas Neocleous & Co remarks: ‘The new regime will further increase Cyprus’s attractiveness as a maritime centre, providing incentives for the employment of EU crew members and the registration of vessels in Cyprus, and enhancing the competitiveness of shipowners, charterers and ship managers.’

Elsewhere, Cyprus has continued to notch up its double taxation agreements, including most recently with Qatar, United Arab Emirates, Germany, Armenia, Czech Republic, Slovenia, Denmark and Kuwait, where a major benefit of the new treaty is the elimination of withholding tax on dividends and interest. The 1984 Cyprus-Kuwait treaty provided for a tax of 10%. Negotiations are also underway to update the double taxation treaty between Cyprus and Ukraine.

Conyers’ Iakavos Panagi comments: ‘This is anticipated to expand economic and trade relations with these countries.’

Expanding horizons

While the market discusses the prospects of more foreign entrants, some local firms are shifting their focus to overseas markets. Pamboridis is one of the few firms to have established a satellite office outside of Cyprus, announcing in February that it will shortly open in Mayfair. The London office will foster closer ties with existing clients and referral firms as well as try to penetrate the City’s sizeable Russian, Ukranian and Greek high-net-worth communities.

The move has raised some eyebrows at home. Even Andreas Neocleous, who is midway through negotiations to expand in Brussels and open Paris and Beijing offices, has said he will not open in London for fear of putting himself in competition with his valued referral law firms.

However, according to George Pamboridis, a representative office is no threat to London firms. He points to the examples of Maples and Calder and other offshore firms who have set up a presence in the City to make it easier to service London clients.

Cyprus also needs to do a better job of raising its profile overseas. ‘Cyprus hasn’t marketed itself as well, it has given the impression that it’s experimenting and not here to stay, but there are lots of reasons to structure through Cyprus,’ Pamboridis insists. ‘We are in the EU, our legal system is based more on the English system and we have a double taxation treaty with the UK.’

‘A lot of young lawyers are coming now with very good qualifications from English institutions and good training.’
Andreas Neocleous, Andreas Neocleous & Co

Neocleous, meanwhile, is in discussions with a small firm in Paris, with a view to opening up a representative office. In Beijing the firm has submitted an application to open in the city, while in Brussels the firm has just bought the building of the only Greek firm in the country, GS Kostakopoulos & Associates, and is expected to enter into discussions with the firm over their combined future in Belgium.

In light of the turmoil in the Middle East and North Africa, a number of plans, including the arbitration centre, may be delayed. Michalis Kyriakides comments: ‘Perhaps it’s not the best time to plan ahead with much certainty because of the volatility in the market and what is happening around us in the Middle East; it’s difficult to take some decisions.’

‘The impact [of natural gas discovery] on the profession will be significant. A chain of transactions will need to be entered into.’
Andreas Haviaras, Haviaras & Philippou

The effects of the uprisings are being felt in a multitude of ways, not least in the tourism industry, where Cyprus hotels opened three months earlier than usual to cater for holidaymakers destined for Egypt. ‘Back in December everyone was complaining about tourism and the problems they would face. It’s unbelievable how a crisis in one part of the world affects another,’ Kyriakides remarks.

The local economy will also receive a considerable boost if a sizeable quantity of natural gas that Noble Energy believes it has found off the south-eastern coast of Cyprus can be developed commercially. The company hopes to begin drilling late this year or early in 2012. If it is viable, the knock-on effect for business and the community in Cyprus would be considerable. Cyprus is already attractive to foreign investors for renewable energy projects, including the establishment of wind farms and solar power plants on the island, with firms including Antis Triantafyllides involved in potential projects. However, the discovery of gas would propel Cyprus into an entirely different league. ‘The impact on the profession will be significant,’ predicts Andreas Haviaras, senior partner at Haviaras & Philippou. ‘A chain of transactions will need to be entered into and a whole set up is to be organised within Cyprus.’

Pamboridis, for one, is already working with a joint venture that is keen to be involved in the commercial opportunities if the suspected gas find is borne out. According to Pamboridis himself, investors are interested in Cyprus not only for its own gas field but the role that it is expected to play in transporting gas only recently discovered off Israel’s northern coast. The Israeli natural gas Leviathan field, confirmed by Noble Energy last December, is being touted as one of the largest offshore gas finds of the past decade.

Pamboridis says: ‘[The joint venture] really believe that Cyprus has a huge role to play both because of its own natural gas fields in its exclusive economic zone but also because it can provide the only route for the transport of the Israeli natural gas from Leviathan to Greece and then the rest of Europe.’

It is worth noting by analogy that for Israel, the confirmed gas field is predicted to turn the country into an energy exporter, with the country’s infrastructure minister last year quoted by the international media as saying it is the most important energy news since the founding of the state. So, too, for Cyprus, where a second licensing round for exploration rights is expected to take place in the latter half of this year. As Mavrellis comments: ‘The international analysts are positive that Cyprus will in the foreseeable future become an exporter of energy products.’

Many lawyers are optimistic that the size of the Cyprus legal market will expand dramatically over the next few years, partly on the back of the discovery of gas. According to Soteriou, the growth figure could be as high as 30-40% in the next 18 months to three years: ‘We are hopeful that energy and natural resources work [will increase] due to initial findings of oil and gas at the shores of the republic.’

Possible suggested developments include new areas of legal practice opening up and new companies being established or relocating to Cyprus. Mavrellis says: ‘Generally the country will find itself in a new era. Let us wait and see.’

The development may be complicated by claims from Turkey, which has occupied northern Cyprus since its invasion in 1974, that the agreement to drill is invalid. A failure to unite the island, despite lengthy and prolonged discussions, has not only complicated Cyprus’s international dealings but also prevents it from tapping into neighbouring Turkey’s vibrant market.

‘Cyprus can be a hub for holding companies to license out their intellectual property rights.’
Achilleas Demetriades, Lellos P. Demetriades

Within the island itself the divide continues to cause major issues and the latest Economist Intelligence Unit review of the Turkish Cypriot zone highlights political unrest resulting from austerity measures imposed by Ankara in January. The review also highlights a February 2011 report by two prominent Turkish Cypriot economists, which shows that out of 139 countries under consideration, the Turkish-controlled part of Cyprus has slipped from a rating of 99 to 117 in the past year. Out of 12 possible benchmarks for progress, it had only seen development in three. The report blamed state bureaucracy, educational deficiencies, lack of investment and unstable policymaking on the part of the government for the decreasing competitiveness of the Turkish Republic of Northern Cyprus.

Despite government promises on both sides to expedite talks to resolve outstanding issues, some local lawyers believe that the issue will not be properly addressed until greater economic and political stability has been achieved. Kyriakides says: ‘Greece has its own problems and Cyprus is low on the agenda and the EU also has its own problems.’

But while Turkey is seen by some as having little will to resolve the situation, Cyprus is widely acknowledged as the biggest stumbling block to its EU accession, and if it is serious about joining the EU it will have to address the issue.

Lawyers are optimistic that the island will be reunited, a move they see as the final missing piece of the puzzle to Cyprus’s international ascent. Kyriakides claims: ‘I don’t think a solution is close but when it does happen – and I think it will happen – it will be a huge impetus to business and development on the island.’

Andreas Neocleous adds: ‘The island has to be united, we have no differences with the Turkish Cypriots at all. We have good relations with firms in the north and good relations with firms in Istanbul and Ankara. If Cyprus is united and our problems are solved, the very first day after I will open an office in Ankara and one in Istanbul and I believe that if Cyprus’s problem comes to an end then Cyprus has a brilliant future.’ LB

caroline.hill@legalease.co.uk

Island leaders

Source: Legal Business

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