Cyprus: Communists ask Russia for financial advice

We interpreted comments made by the Cypriot finance minister that suggested the country was seeking financial advice from Russia. We accept that the finance ministry holds regular talks with a number of counterparts and that this interpretation was misleading.

It is like a story from a magical realist film on the world after 1989. A finance minister chosen by the European Union’s first communist head of state looks to Russia – to try to resurrect his country’s position as an offshore centre of capitalism. The minister is even trying to persuade hedge fund managers who have been scared of tax changes in the UK to relocate to his country.

Charilaos Stavrakis: changing wrong ideas

“At the beginning there were some unjustifiable concerns that things would be different under the new government. Our first priority was to change these wrong ideas,” Charilaos Stavrakis, finance minister of Cyprus, tells Euromoney. Stavrakis was chosen by president Demetris Christofias after Christofias’s Cypriot communist party won elections earlier this year. “The whole administration, including myself, gave particular emphasis to our commitment to maintain and strengthen the position of Cyprus as an international business centre,” says Stavrakis.

The most important aspect of this in practice is that there will be no changes in tax rates. “We are committed not to raise present corporate or personal tax rates, because this is the most important strategic weapon we have to attract foreign business,” says the minister. At 10%, Cyprus enjoys the lowest corporate tax rate in the European Union. It also has a relatively low maximum personal tax rate of 30%.

Nevertheless, under the new government there will be a bigger push to help the poorer sections of society.

“To do this, we are trying to reduce tax evasion among some segments of the population and increase the effectiveness of the tax collection process, particularly among self-employed Cypriots,” says Stavrakis.

Good weather and low tax rates have brought to Cyprus buyers of second homes and companies looking for an attractive place to register. Inward real estate investment in Cyprus has doubled since the country entered the EU four years ago.

But Cyprus’s most important trade relationship is with Russia. Indeed, Cyprus is the world’s single-biggest source of foreign direct investment in Russia.

The origins of Cyprus’s importance as a source of investment in Russia stem from a double taxation treaty established between the two countries in the early 1960s. This allows Cypriot companies to do business in Russia and export profits to their home country while paying minimal withholding tax on dividends, among other benefits.

During the previous government, however, Cyprus was put on a tax black list by the Russian central bank and finance ministry. Understandably, there has been an effort to resolve this. Stavrakis himself made a trip to Moscow recently, meeting his Russian counterpart, as well as other officials.

“One of the problems was the reluctance of the Cypriot tax authorities under the previous administration to disclose information requested by Russian and other authorities,” says Stavrakis in an interview with Euromoney in mid July. “We passed in parliament an exchange of information act based on the OECD model, under which there is a structured way in which we can disclose information to foreign tax authorities.”

Attracting the big spenders

India, Ukraine and China are the three other countries Stavrakis mentions when discussing the potential of his country as a financial centre. He has plans to visit both China and India soon, and has already visited Ukraine.

“We want companies from the big emerging markets to think of Cyprus when they want to invest in the European Union,” he says. “Similarly, when international companies want to invest in these countries, we want them to consider doing it through Cyprus. Ideally, we would like them to have a physical presence in Cyprus, to have their regional offices here, which would bring high-quality employment and other advantages to the economy.”

The finance minister has already given his approval to a scheme with Cyprus-based hedge fund Ikos and the Cranfield School of Management to attract successful Cypriot expatriates back to the island.

Stavrakis himself has an MBA from Harvard University and was a banker for 30 years. He was previously chief executive of Bank of Cyprus, the country’s largest lender.

We interpreted comments made by the Cypriot finance minister that suggested the country was seeking financial advice from Russia. We accept that the finance ministry holds regular talks with a number of counterparts and that this interpretation was misleading.