Foreign direct investment (FDI) in Cyprus

FDI in Figures

In recent years, Cyprus ranked among the top destinations in terms of attractiveness for foreign direct investment thanks to its rapid economic turnaround and advantageous business operating environment. However, after the outbreak of the COVID-19 pandemic, Cyprus has seen a sudden decline in FDI inflows. According to UNCTAD's 2022 World Investment Report, FDI inflows amounted to USD 463 million, 90% less than the previous year, also marking the sixth consecutive year in which net FDI transactions remained negative. The total stock of FDI stood at USD 406.4 billion, more than fourteen times the size of its GDP (one of the highest ratios in the world). According to the Central Bank of Cyprus, the sectors that attracted the most FDI are financial and insurance activities (accounting for roughly 90% of the total stock), transport and storage, real estate, tourism, pharmaceuticals and energy. The main FDI partners are the Russian Federation, Luxembourg, the Netherlands, the United Kingdom and Germany.

Sectors such as financial intermediation benefited from government policies and Cyprus began receiving large amounts of FDI annually. Large-scale projects, tourism infrastructure, and privatisations are also receiving a good chunk of FDI. Moreover, the government is trying to attract FDI in newer sectors such as film production, investment funds, education, research & development, information technology, and regional headquartering. An added benefit is the country’s secure and stable EU environment in a turbulent region, which also provides an ideal base for regional headquarters or ancillary and support services for investors with clients in the wider eastern Mediterranean region. Cyprus does not have a mandatory foreign investment screening mechanism (although a draft bill on the subject was presented in 2022); however, there are some ownership limitations and licensing restrictions for non-EU investors in specific sectors, such as private land ownership, media, and construction. On the other hand, the country has a small domestic market and the banking sector is still recovering from the 2009 crisis: Cyprus' high overall indebtedness continues to limit Cypriot banks' growth potential and elevates economic vulnerability. Furthermore, tensions still exist between the Turks and the Cypriots parts of the island; and the country remains highly dependent on Russia and the UK as export markets and sources of financing. Overall, Cyprus ranks 27th out of 132 in the 2022 Global Innovation Index, 51st out of 180 in the Corruption Perception Index, and 40th out of 82 in the Economist Business Environment ranking.

What to consider if you invest in Cyprus

Strong Points

The country's strong points are:

• A strong business-friendly environment with one of the lowest corporate tax rates in Europe (12.5%, the lowest in Europe together with Ireland)
• Membership in the European Union and the eurozone
• A strategic geographical position at the crossroads of three continents, offering access to markets in Europe, the Middle East and the Maghreb
• A multilingual, experienced and low-cost workforce
• High-quality transport and telecommunications infrastructure, particularly in the ports sector
• A particularly developed tertiary sector: tourism, international business and financial services, maritime transport, etc.
• An attractive lifestyle in a secure, neat and healthy environment, with a high standard of living
• A business-friendly environment, solid regulation, legal system aligned with British common law

Weak Points

The main weaknesses of the country are:

• The weak attraction of its internal market with a population of around 1.2 million inhabitants (World Bank, 2019 latest data available)
• High public debt (118.4% of GDP in 2020, IMF) and significant external debt linked to bank deposits of many non-residents
• A banking sector still weakened by the 2009 crisis, despite numerous reforms imposed by the EU, the IMF, and the ECB
• Heavy reliance on Russia and the United Kingdom as export markets and sources of funding
• The division of the island since 1974 and the difficulties to reach an agreement between the Turks and the Cypriots could have in the long term a negative impact on the attractiveness of the country.
• Excessive dependence on the service sector (84% of total output), especially tourism, finance, and housing

Government Measures to Motivate or Restrict FDI

The Cypriot government has created a positive environment for business as proven by its 54th place in the 2020 Doing Business ranking of countries where it is easy to do business. The government's liberal policies have promoted investment development. Some key points of the country's appeal are:

• The possibility of 100% foreign shareholding in almost all sectors of the economy
• One of the lowest corporate tax rates in the European Union (12.5%)
• An attractive tax environment (Cyprus has signed double-taxation treaties with over 50 countries)
• Cost of establishment and business development very competitive for companies

The country manages to create an attractive environment for investors by strengthing weaknesses in its economy. For example, since 2013, the government has been restructuring the country's banking sector. This, combined with the recapitalisation, enabled it to avoid bankruptcies and improve stability. Likewise, progress has been made to modernise and make its legal, accounting and banking services more efficient.

Bilateral investment conventions signed by Cyprus

Cyprus has signed bilateral convention with about 10 countries. To this figure, we have to add the 26 other European Union countries. On the Mediterranean basin, and out of EU, Cyprus only signed bilateral conventions with Egypt and Lebanon. 7 conventions can be found on the UNCTAD. They define the protection framework of FDIs in Cyprus for each signatory country.