For years the Republic of Cyprus has been the gateway to Europe for thousands of Russian investors – and the gateway to Russia for many European investors.
That remains true today, despite the political and economic turmoil that continues around the island’s borders. While its cultural cousin Greece struggles with severe debt problems and surrounding Arab nations are locked in conflict, Cyprus remains relatively strong and stable, despite the failure to resolve the deadlock between the northern Turkish-occupied half of the island and the Greek southern half.
Like many others worldwide, Cyprus was in recession in 2009, but in 2010 emerged into modest GDP growth. Recent elections saw little change in the composition of the country’s parliament, where three parties govern as a coalition.
It is this stability that lawyers think helps encourage clients to continue coming to the island. They also believe this is one of the factors that is now attracting an increasing number of clients from countries other than Russia to choose Cyprus as a jurisdiction in which to set up businesses.
Lawyers say activity is good across a range of practice areas. However, last year painted a slightly different picture.
“2010 was a difficult and challenging year for law firms,” says Andreas Neocleous & Co corporate and commercial head Elias Neocleous. “To my knowledge most of the law firms achieved no growth or negative growth.
“The local market’s still in recession. Although the Cypriot economy’s independent from the Greek economy, there’s a psychological nexus that limits appetite for new business.”
Others agree that the increase in business for law firms identified during the first half of 2011 is due primarily to international work. Harris Kyriakides partner Michalis Kyriakides says local deal activity such as property work has dropped away entirely.
But the source of international work has diversified somewhat in recent years. As well as law firms’ core client base of Russian, CIS andEastern European investors, work is increasingly coming from other emerging markets – mainly China and India.
“We’ve had a lot of work in the past few years and work’s picked up from India because they see Cyprus as a gateway into Europe,” reports Alexandros Economou, a partner at Chrysses Demetriades & Co, although he adds that “the prime driving force of financial services is still Russia”.
According to Economou, initially Indian clients were referred to Chrysses through lawyers in Singapore. Now Indian clients are coming directly to the firm or are referred through Indian lawyers, although Economou says Chrysses does not have any alliance arrangements, formal or informal, with Indian firms.
China is also identified as a source of investment. Representatives of the two country’s governments have met several times in recent months to build relations, including in economic activities.
The main reason for Cyprus’s success in building international businesses, say Cypriot lawyers, is the jurisdiction’s extensive network of tax information exchange agreements (TIEAs). The island’s government has now signed 50 TIEAs with both developed and developing nations. In October last year Cyprus also updated its TIEA with Russia, signing a protocol bringing the treaty more into line with Organisation for Economic Cooperation and Development (OECD) rules. The protocol means Cyprus is no longer on Russia’s tax ’blacklist’ and will enable Russian companies to avoid paying tax on dividends from Cypriot companies.
Although the protocol only came into force last October, the foundations were built in 1998 with the original Russia-Cyprus Double Tax Treaty. The number of Russians coming to Cyprus certainly helped to develop the country’s competitiveness, but business from other countries took an upward swing with admission to the EU in 2004.
Meanwhile, despite a continuing flow of work from Russia, there are signs that this is easing off. Russian lawyers report that their clients are considering other jurisdictions as places to set up holding companies, such as the Netherlands, suggesting that despite Cyprus’s efforts some investors are looking for jurisdictions with stronger reputations for tax transparency.
The investors still going to Cyprus to establish companies are increasingly using the jurisdiction as a jumping-off point for IPOs around Europe. London remains the most popular exchange for this purpose, although several lawyers also point to Warsaw as an IPO location.
“We have substantial work from listings on central European exchanges,” confirms Stelios Triantafyllides, a partner at Antis Triantafyllides & Sons.
But there is a feeling in the Cypriot legal market that, despite the country’s advantages of geography, common law history and experienced advisers, it could have made more of the opportunities presented during the financial crisis. In particular, lawyers point to the lack of progress made in encouraging investment managers, particularly those running hedge funds, to domicile their products and set up their businesses in Cyprus.
“The Cypriot authorities used to play a much more active role in promoting Cyprus as a jurisdiction. That was mainly due to the involvement of the Central Bank [of Cyprus],” recalls Pavlos Aristodemou, managing partner at the Cyprus office of offshore firm Harneys. “With our accession to the EU the Central Bank no longer plays a vital role because foreign exchange control rules have been lifted. Therefore it’s up to the wider market and professionals to promote Cyprus. The Cypriot authorities are trying, but I think they could do more.”
“It’s an area where we’d all have wanted to be bigger,” says Triantafyllides, whose firm is in an association with Conyers Dill & Pearman. However, he adds that there is some legislation in the pipeline to help encourage investment funds and their managers to come to Cyprus. He believes the crisis is not yet far enough away in time to really judge whether the authorities did enough to build this particular area of business.
“We need to be on the map, and to get on the map you need the legislative regime, but [there’s also a] substantial element of fortune that causes these things to happen,” Triantafyllides says.
Neocleous is more blunt. “We could have attracted huge hedge funds had our authorities done a bit of marketing,” he argues. “They did absolutely nothing. The public sector didn’t see an opportunity there and that’s a pity. It’s now too late. There was a big opportunity there and it isn’t there any longer.”
Aristodemou says one thing the authorities have done is simplify Cyprus’s company registration procedures in addition to improving the online services for companies registered in Cyprus. He sees this as essential to maintaining the jurisdiction’s competitiveness.
“If we’d like to be one of the best jurisdictions in the world,” he says, “we must definitely have one of the best systems in the world.”
Economou also points to improvements to company legislation and the digitisation of the companies register as being significant developments.
“This digitisation is very good for everybody,” he enthuses. “It will be easier to do business with the registrar.”
Although corporate activity is fairly prominent in Cyprus, the island’s legal market is still overwhelmingly domestic. Harneys is the only foreign firm to have really established itself in the market.
Aristodemou says the December 2009 merger between Harneys and Aristodemou Loizides Yiolitis has not really changed the way the firm works. It still focuses on three main practice areas – corporate, banking and tax – and clients are predominantly financial institutions from Russia and Europe.
According to Aristodemou, the founding partners deliberately established the firm with a view to making it accessible to potential mergers.
“You might say we’re much closer to a Western model as opposed to the strong family brands that people have here,” he says. “It’s not that it’s better or worse – it’s just that it’s completely different.”
So far the merger has worked out well, albeit integration remains slow and steady.
“I think that this was the right decision,” says Aristodemou. “There’s a good cultural fit.”
The firm has already made up its first Harneys partner. Nancy Erotocritou’s promotion in January brought the number of partners in Cyprus to four, with a team of eight other lawyers in support.
Aristodemou believes the tie-up has given the firm a USP in Cyprus, in that it can offer international services and expertise to clients from its Limassol base.
He does not think many other Cypriot firms would be able to pursue the merger route.
“There are certain elements that one has to take into consideration when proceeding with a merger,” he says. “Number one would be scale, number two would be economics and number three would be the cultural fit. Cyprus is different from other jurisdictions because you’ll find a limited number of law firms to approach.”
His opinion is shared by others.
Triantafyllides is happy with the association route pursued by his firm and Conyers. The relationship has allowed it to second a lawyer to Moscow, where Conyers has its own office, but it is unlikely that things will become more formal.
“Being a family firm hasn’t impeded our growth at all,” contends Triantafyllides. “Cyprus is a small country, there’s a family tradition; the fact is that it works.”
However, one of Cyprus’s family firms has expanded overseas. Andreas Neocleous & Co now has six offices outside Cyprus – in Brussels, Budapest, Kiev, Moscow, Prague and Sebastopol – and is well on the way to adding a seventh in Beijing. Elias Neocleous, Andreas’s son, acknowledges both the role his father has played in establishing and managing the firm and the need for a solid succession plan to ensure its survival.
“My father’s a huge asset to the firm and I’m not sure we’ll ever be able to replace him,” Neocleous says, before explaining that the firm restructured as a Swiss Verein last year. “We’re trying to run our practice as a business – we think this is the correct way to do it.”
Neocleous adds that the investment involved with expanding overseas has been worth the effort.
“The exercise of having a nexus of offices is enormous,” he explains. “We like the challenge, we like to be creative, and despite the difficulties, we’re trying to do our best.”
The firm now has plans to build up internationally. As well as opening a representative office in China to take advantage of increased investment flows from that country, Neocleous says the firm wants to bulk up in Eastern Europe. There will be a particular focus on Ukraine – a much less competitive market than Moscow. However, even in Moscow Neocleous says the firm’s persistence is paying off with beauty parade wins – admittedly not on big-ticket work, but with supporting roles on transactions.
Strength in numbers
In Cyprus Neocleous sees the main competition at present as coming from the accountancy practices.
“The accountancy firms, although they don’t admit it, have in-house legal departments or good tax and reorganisation departments, and they aim for this part of the work,” he says. “They’re well-organised. They have all the Western knowhow, unlike lawyers, who are individualised – we don’t like working in teams.
“We’re the only firm that can compete with the accountancy firms. Sometimes it’s difficult because they’re getting very aggressive.”
Within Cyprus’s professional services sector lawyers and accountants alike are doing better than most of their peers in professions such as architecture, marketing and management consulting. Data from the country’s statistical agency showed a 4.4 per cent increase in turnover for lawyers and accountants combined between 2009 and 2010 (see table). Since 2005 there has been an 80 per cent rise for this group, compared with an 89 per cent rise for management consultancies but an increase of just 16 per cent for architects and engineers.
But most of the work in Cyprus remains inbound, leading the market to conclude that international firms will stay well away.
“The numbers aren’t there for the big boys,” admits Aristodemou.
The arrival of other offshore firms is more likely, although Kyriakides says the offshore market is already quite active in Cyprus. “Every big firm in Cyprus is cooperating with a number of offshore firms,” he reveals. “Some of these are announced and celebrated, and others aren’t.”
In the absence of foreign firms coming to Cyprus, all the law firms on the island report significant recruitment of associates from overseas. Even the majority of Cyprus-trained associates are educated in the UK, and several firms now also employ lawyers who are natives of other countries. For example, Antis Triantafyllides’ ranks include legal consultants from Russia, Bulgaria and the UK in addition to a growing list of Cypriot lawyers.
Other than the Harneys-Aristodemou Loizides Yiolitis merger there has been little change in the overall shape of the legal market in Cyprus. Neocleous says a few new boutiques have been established by lawyers leaving established firms, but he expresses doubt over whether these niche firms will survive due to the financial investment required to succeed in such ventures.
Meanwhile, the rest of the market will keep promoting Cyprus as a solid and stable jurisdiction for a range of financial services. The republic taking over the presidency of the EU Council in July 2012 presents a real opportunity to build up Cyprus’s profile among new investors. And Cypriot lawyers are ready to seize the moment.