Steadying the ship of the Cyprus Economy

By Stelios Havatzias, advocate, Christodoulos G. Vassiliades and Co LLC. (01/01/2014)

The small island of Cyprus has featured quite prominently in world news the last six months but unfortunately for all the wrong reasons. You would be hard pressed to look for an article regarding Cyprus that didn’t mention the words ‘bailout’, ‘banking’ or ‘crisis’. However it is not all doom and gloom. In the shipping world, Cyprus is already a big fish and in these difficult times it might just be the place to turn to as it rides out this economic storm. 

Clichés such as ‘beacon of hope’ and ‘silver linings’ when economies are in a recession are often quickly bandied about, but when it comes to the shipping industry, Cyprus has a real reason to feel optimistic. 

The Cypriot shipping register was created in 1963 and has experienced strong growth since its formation. Initial accusations of being a flag of convenience were dispelled during the 1980’s when the Cypriot government introduced stricter legislation and tighter regulations regarding ship registration requirements to reach the point today whereby Cyprus was removed from the Black Lists of the Paris and Tokyo MOU, being promoted to the White List. Between 1980 to 2001 the Cypriot registered fleet increased from just over two million gross tons (GT) to almost 30 million GT, in fact during the early 90s, the Cypriot shipping registry was being described by members of the shipping community as the trade’s best kept secret. Today, the Cypriot fleet roughly equates to a quarter of all the ships registered in the European Union (EU) and the Cyprus shipping registry is the tenth-largest in the world, largely due to the fact that it is one of the only two 'open' registries in the EU. 

The attraction to Cyprus as a flag further increased when it joined the EU, which brought along all the benefits attributed with the harmonisation changes and the EU diplomatic protection afforded to Cyprus ships. This was then followed up by the implementation of the favourable Tonnage Tax scheme in March 2010, approved of by the EU. The benefits of this scheme are extended to owners of Cyprus ships and foreign vessels, charterers and ship managers who own, charter or manage a qualifying ship pursuing a qualifying activity. Members of the scheme are exempt from paying income tax derived from the operation of the ships, due to the fact that, as the name of the scheme would suggest, the tax is calculated on the basis of the tonnage of the fleet. The Tonnage Tax scheme also covers profits from the sale of vessels; interest earned on funds used other than for investment purposes and dividends paid directly or indirectly from shipping-related profits. 

Aside from the obvious geographical attractions of Cyprus as a shipping hub, due to its ideal location between three continents and a gateway to the Suez Canal, Cyprus offers a great deal to third party ship management companies. President Anastasiades recently stated at the 2013 Maritime Conference held biannually in Cyprus that, “Cyprus is the largest third-party ship management centre in the European Union and one of the largest globally…” and “…around 150 internationally renowned ship-owning, ship-management, chartering and shipping related companies operate from Cyprus, controlling a fleet in excess of 2,200 ships, while the wider shipping sector employs approximately 4,500 employees and 55,000 sea-farers”.

Cyprus offers various tax benefits to those qualifying as tax residents of the Island. Specifically at 12.5 per cent it has one of the lowest rates of corporate tax in the EU.
Additionally there is no estate duty on inheritances of shares in a Cyprus shipping company and no stamp duty is due on ship mortgage deeds. Cypriot companies can also take advantage of various double tax treaties with over 50 countries. Other attractive features of Cypriot tax legislation include: tax exemption on dividends (although certain dividends are liable for the 'Special Defence Contribution') and on profits of foreign permanent establishments; and no withholding taxes on repatriated dividends, interest and most royalties. 

A good indication of the high regard and value that the Cypriot Government has for the shipping industry, which accounts for over five per cent of its GDP, can be seen by the actions of the Central Bank of Cyprus in its ring-fencing of the money held by shipping related companies in Cypriot banks during the freeze of bank deposits at the peak of the financial crisis in March/April 2013. During this period, payments in relation to shipping activities were exempt from the embargos put on the banks and the shipping industry was left relatively untouched by the affair. This can be reflected by the fact that the size of the Cyprus fleet has remained the same and there has been no rush to leave these shores, allaying the fears of some industry experts.

Since the discovery of offshore oil and gas reserves, Cyprus has been busy making plans to develop LNG terminal constructions and various other facilities linked to offshore oil and gas drilling. VTTI are close to completing a new 300 million Euro terminal project situated at Vasiliko, located on the south coast of the island. Phase One of the project is almost complete, which will create an initial 20 tanks and a capacity of 357,000m3. Phase Two will create an additional eight tanks and extra capacity of 186,000m3, and will be completed in the second quarter of 2014. A third planned expansion would bring the total capacity at VTTV to 858,000m3. 

The fact that Cyprus already has an existing shipping infrastructure and a solid platform to build upon, coupled with the discovery of oil and gas reserves off its shores, gives Cyprus an opportunity to blend these two huge industries. The recent difficulties suffered by Cyprus will help focus the efforts of the Cypriot government to further promote, improve and make Cyprus a more attractive location to the shipping community.