Contrary to the cliché of beautiful beaches and holiday panoramas one might associate with Cyprus, the backdrop to my Zoom call with Pieris Markou is a rather striking 38-storey building of expensive luxury flats largely, one suspects, populated by the burgeoning expat community in Cyprus. 

“Tourism isn’t enough,” Markou, Chief Executive Officer of Deloitte Cyprus, tells ICAEW Insights. As Cyprus looks to emerge from the pandemic, its strategy for plugging the hole in public finances that have resulted from COVID follows a tried and tested route. “We need to continue to bring in foreign investment.”

It’s clear that boosting tax receipts from the island’s tiny working population of around 500,000 is a flawed strategy for recovery. Instead, and as the Cypriot economy looks to capitalise on the post-COVID economic rebound – official figures predict 3.8% growth this year and 4.4% in 2022 – the plan focuses on retaining Cyprus’s low tax rate as a draw for Foreign Direct Investment (FDI) and overseas companies setting up in the country, Markou explains. 

“Even in this difficult time the government has stated that they are not looking to increase taxes, they are looking into investing and using some of the funds the European Union is making available through changes in legislation and practices that will make the country more efficient which will hopefully make the country more attractive and generate the indirect benefits of FDI increasing,” Markou says.

Already there’s a heavy reliance on FDI: around 70% of business for Deloitte Cyprus comes from international investors. It’s a good reflection of the Cypriot economy as a whole. “We rely a lot on it. If you increase the tax rate but lose investors, you’ll end up collecting less taxes.”

Cyprus’s standard corporate income tax rate increased from 10% to 12.5% in 2013 following the country’s economic crisis, where it has remained ever since despite changes of government and a swing from left to right. Alongside Ireland, it is the lowest corporate tax rate in the EU. It is that combination of low tax rates, stability and a pro-foreign investment stance that has made the country an attractive proposition for overseas investment Markou believes. There’s no reason why the post-pandemic era should be any different, he believes. 

At the same time, the indirect benefits gained from foreign investments more than outweigh the risk of a low tax base, Markou says. “I recently had a tech company that moved its base to Cyprus bringing 200 people – that means they have to rent 200 houses, send their children to private schools, they bought them all company cars. Then the government will also collect taxes from those individuals and firms servicing those clients.”

The pressure to increase taxes is ramping up as the EU continues to exert pressure on low tax jurisdictions and aggressive tax planning. In June the G7 signed a historic agreement to tackle tax abuses by multinationals and online technology companies, after agreeing to a minimum 15% global corporate tax rate for the first time. G20 finance ministers approved the tax reform a month later, paving the way for the new rules to be in place by 2023. The proposal to introduce a global corporate tax rate of 15% has now been approved by more than 130 countries.

Whether Cyprus bows to that pressure remains to be seen. However, any increases in tax rates would be offset by tax breaks for foreign investors, Markou explains. Use of tax reliefs has already proved an effective tool to stimulate FDI; they include those aimed specifically at expats coming to Cyprus to work and a non-dom regime so foreigners aren’t taxed on investment income. “Whatever changes the Cypriot government makes, they will make sure they give back to the businesses what they will take. It’s a good message,” Markou says.

The government has already set the burgeoning tech sector in its sights with efforts underway to make the island a technology hub, alongside an existing focus on real estate, tourism and shipping. There’s a recognition that while low tax rates may be a trigger to stimulating investment interest, is just one component of a package of measures designed to boost Cyprus’s standing in the FDI stakes, which also includes the creation of dedicated government departments – for shipping and tourism, for example - created to underline the state’s commitment and targeted measures to boost the skills base of the island. 

“We have a highly educated labour force and a high percentage of school leavers go on to higher education. There are efforts to increase English or French-speaking international schools. Even the educational institutions are trying to come up with programmes or sponsorships that would be carried out with IT companies and universities to promote and to generate labour around this industry,” Markou says. 

Similarly, Markou says the government has oiled the licencing cogs to make it easier for overseas businesses to set up operations, including fast track schemes for immigration licences and work permits for non-EU personnel.

Fortunately for Cyprus, the impact of COVID on public finances is not at an unmanageable level and the plan is to plough the € 1.2bn of EU funding to be received in the form of the European Recovery and Resilience Fund into reforms focusing on efficiency and indirectly helping to generate more revenue to cover the deficit, Markou explains. The government also estimates that this funding will generate €1.4bn in additional investments from the private sector.

And if there’s one good thing to come out of the pandemic, it’s that remote working has become the norm. “Whereas in the past, companies might have thought it might be difficult to be located on an island and do business globally but now it’s much easier and less time-consuming.” More time for enjoying those beautiful beaches, wouldn’t you say.