CYPRUS – A Growing Hunger for Franchising
By Ephie-Yvonnie Charalambidou
Commercial Specialist, U.S. Embassy, Cyprus
Doing Business in Cyprus in a nutshell…:
Franchises in Cyprus enjoy some of the highest sales volumes per capita and margins in Europe and the
Middle East. If your franchise is not yet represented in Cyprus, it should be. Here’s why:
The Republic of Cyprus is an eastern Mediterranean island strategically located at the crossroads of
three continents; Europe, Asia, and Africa. Given its location along ancient trade routes and its
importance as an ancient source of copper, Cyprus is a nation with a long tradition of trading and
openness to new ideas. A European Union member since May 1, 2004 and a member of the Euro-Zone
since January 1, 2008 Cyprus also enjoys excellent business relations and flight connections with the
Middle East. Despite the recent worldwide economic downturn, Cyprus’s growth was less affected than
most thanks to conservative government fiscal management and industry focus on financial services and
tourism. The country enjoys low inflation and low unemployment rates and consumer purchasing
power is high at an estimated per capita GDP of US$30,744 in 2008. With the lowest corporate tax rate
in the European Union (EU) at only 10%, the island is an ideal jurisdiction for Holding Companies.
Moreover, it has over 40 bilateral tax treaties, including with the United States. Cyprus has no
withholding tax imposed on dividend income, interest, or royalty payments effected to non-Cypriot
beneficiaries. Profits from overseas permanent establishments are tax exempt. In the World Bank
“Ease of Doing Business” survey, Cyprus ranked 40th out of 183 nations.
The banking, accounting, legal, and financial services are extremely efficient and one of the strong
points of the economy. The labor force is largely multilingual and highly qualified and the labor costs
are low compared to the EU average. Cyprus has an advanced telecommunications network and
infrastructure, as well as, a wide network of air-routes offering excellent connections with Europe,
Africa, and Asia, as well as modern ports and first-rate sea connectivity. Cyprus ranks among the 10
leading maritime nations in the world and is a highly reputable international shipping center with a
merchant fleet exceeding 21 million gross tonnage (accounting for 16% of the EU fleet) and nearly 2000
vessels. It constitutes one of the largest ship-management centers in the world with around 50 shipmanagement companies and marine-related foreign enterprises that conduct their international
activities in the country.
Market Potential:
U.S. franchises, particularly in the food business, have been extremely successful in Cyprus in recent
years. Companies that opened franchise outlets in Cyprus since 1990 include: McDonalds, Burger King,
Starbucks, Coffee Beanery, Pizza Hut, Papa John's Pizza, KFC, Bennigan’s, TGI Friday’s, Orkin, and Curves.
Century 21, Remax and ERA have also opened offices on the island. The most recent opening on the
island is Cinnabon. Moreover, Taco Bell will also open before the end of the year. Operation of these
ventures results in returns in the form of licensing fees and royalty payments every year for U.S. and
other foreign franchises.
Besides the U.S. franchises on the island, there are many Greek and other franchises including Folli
Follie, Accessorize, Everest, Pita Pan, Goody’s, Costa Coffee, and Gloria Jeans. Cypriots are exceptionally
brand-conscious and present trends suggest that the franchising sector will continue to grow over the
next several years. Although the Cyprus market may be considered small, companies must also
account for the tourism inflow, which ranges from 2 – 3 million people per year. Another very
important factor that has helped the franchise sector grow so significantly on the island is the high
disposable income of its residents. The majority of Cyprus’ workforce enjoys job security and a steady
income from working for the Government, the semi-Governmental organizations, and the large financial
services sector. Cypriots tend to be big spenders by nature and have an affinity for foreign products.
Legal Environment:
Cyprus follows Common Law practices and abides by EU directives as a European Union member. Its
legal system is one of the strongest points of the economy and considered one of the most efficient
sectors in services. There is only one sector in franchising in which Cyprus has not yet complied with EU
laws and regulations and that is Real Estate. Efforts to amend the current Cyprus law to allow full
franchising rights to real estate firms continue.
Forms of Franchising:
There are no restrictions for entry from any foreign franchisor, with the exception of the Real Estate
sector (see above). All forms of franchising can be applied in Cyprus whether direct or master
franchising, regional development, joint venture, or establishing affiliates. Registering a company and
forming bank relationships is easily and quickly accomplished and can take as little as one week to
complete. Local lawyers and accounting firms can provide a full range of services to complete the
process.
Market Challenges - Political Stability:
Cyprus has been divided since the Turkish military intervention of 1974, following a coup d'etat directed
from Greece. Since 1974, the southern part of the island has been under the control of the
internationally-recognized Government of the Republic of Cyprus. The northern part of the island is
administered by a Turkish Cypriot administration. In 1983, that administration proclaimed itself the
"Turkish Republic of Northern Cyprus" ("TRNC"). The "TRNC" is not recognized by the United States or
by any other country except Turkey. The two parts are separated by a buffer zone patrolled by United
Nations forces. A substantial number of Turkish troops remain on the island. There are currently
ongoing direct negotiations between the two communities to resolve the island’s political division.
There has been no serious inter-communal violence since 1974, other than an isolated incident in 1996
resulting in the deaths of two Greek-Cypriot civilians during a demonstration in the buffer zone. The
partial lifting of travel restrictions between the two parts of the island in April 2003 has allowed
movement of persons – over eleven million crossings to date -- between the two parts of the island with
no significant interethnic incidents. In August 2004, new EU rules allowed goods produced in the north
to be sold in the south provided they met EU rule of origin and sanitary/phyto-sanitary requirements. In
May 2005, the Turkish Cypriot "authorities" adopted a new regulation "mirroring" the EU rules and
allowing certain goods produced in the south to be sold in the north. While trade between the two
communities remains limited, it has been growing rapidly. Suppliers of imported products in the
government-controlled area cannot directly serve the Turkish Cypriot market and vice versa.
Economic Growth:
(Refers to the government-controlled area unless otherwise specified)
Cyprus has an open, free-market, services-based economy with some light manufacturing. Cyprus'
accession as a full member to the European Union as of May 1, 2004, has been an important milestone
in its recent economic development. The Cypriots are among the most prosperous people in the
Mediterranean region. Internationally, Cyprus promotes its geographical location as a "bridge" between
three continents, along with its educated English-speaking population, good airline connections, and
telecommunications. A major U.S. technology firm proposes to use Cyprus as a “beta” site for a major
new product.
In the past 20 years, the economy has shifted from agriculture and light manufacturing to services.
Currently, agriculture makes up only 2.4% of the GDP and employs 8.2% of the labor force. Industry and
construction contribute 18.3% and employ 20.5% of the labor force. The services sector, including
tourism, contributes 79.3% to the GDP and employs 71.1% of the labor force. In recent years, the
services sector, and financial services in particular, have provided the main impetus for growth, while
tourism has been declining in importance. Manufactured goods account for 58.3% of domestic exports,
while potatoes and citrus constitute the principal export crops. The island has few proven natural
resources. Trade is vital to the Cypriot economy and most goods are imported. The trade deficit
increased in 2008, reaching $9.1 billion. Cyprus must import fuels, most raw materials, heavy machinery,
and transportation equipment. More than 67% of its imports come from the European Union,
particularly Greece, Italy, and the United Kingdom, while 1.7% comes from the United States.
GNP growth rates have gradually begun to decline as the Cypriot economy has matured over the years.
The average rate of growth went from 6.1% in the 1980s, to 4.4% in the 1990s, to 3.6% from 2000 to
2008. In the last couple of years (2007 and 2008) growth has remained fairly strong at around 4.4% and
3.8%. Cyprus is the only country in the Eurozone expecting positive growth in 2009, although it is
forecast to remain barely above zero (0.3%) due to the global financial and economic turmoil. Cyprus’
prudent Central Bank and conservative bankers have shielded it from the excesses of other financial
centers. Inflation soared to 4.4% in 2008 but is expected to drop to around 0.9% in 2009 as the domestic
economy slows down. Cyprus continued to have one of the lowest unemployment rates in the EU during
2009 at around 4.7%, although this is considerably higher than the 3.8% recorded in 2008. Public
finances have been in a fairly good shape in recent years, with an almost balanced budget (1.0% surplus
in 2008, and an estimated 0.8% deficit in 2009) and relatively low public debt (49.3% of GDP in 2008 and
on its way down).
Cyprus has been a successful member of the Eurozone since January 1, 2008, when it replaced the
Cyprus Pound with the Euro. Joining the Eurozone was a major accomplishment for the Cypriot
economy, resulting in such benefits as a higher degree of price stability, lower interest rates, reduction
of currency conversion costs and exchange rate risk, and increased competition through greater price
transparency.
Investment Climate:
In the run-up to EU accession (May 1, 2004), Cyprus dismantled most investment restrictions, attracting
increased flows of foreign direct investment (FDI), particularly from the EU. As a result, Cyprus has
developed into an important regional and international business center. According to the latest United
Nations Conference on Trade and Development (UNCTAD) "World Investment Report 2008," Cyprus
ranks among the world's leading countries per capita in terms of attracting FDI. Non-EU investors (both
natural and legal persons) may invest freely in Cyprus in most sectors, either directly or indirectly
(including all types of portfolio investment in the Cyprus Stock Exchange). The only exceptions concern
primarily the acquisition of property and, to a lesser extent, restrictions on investment in the sectors of
tertiary education, banking, and mass media.
Significant investment is attracted to Cyprus for onward investment elsewhere. For example, Cyprus is
one of the largest sources of investment into Russia as global businesses take advantage of Cyprus low
corporate tax rates and efficient financial services sector, as well as its bilateral tax treaty with Russia
(and 40 other nations) to establish Cyprus holding companies with operating companies located in
Russia and other nations. A large U.S. franchise has established a Cyprus company to hold the master
franchise rights for Middle East and Eastern Europe.
The flow of U.S. investment in Cyprus reached $16.0 million in 2008 or 1.0% of Cyprus' total inward FDI.
The stock of U.S. investment in the island was $379 million at the end of 2008. Recent projects involving
U.S. investment collaborations with Cyprus include several well-known U.S. foods and drink-related
franchises, an agreement between a U.S. university medical center and a well-known Cyprus group of
companies for the creation of a specialized hospital in Cyprus, major investments in energy exploration
and infrastructure, and a significant agreement between U.S. universities and corporations with the
Cyprus Institute in the fields of science and technology among others.
For additional information on doing business in Cyprus, please contact the U.S. Embassy in Nicosia at
357-2239-3520, email Agrotou@state.gov, or visit our website at buyusa.gov/cyprus.
Notes:
1.
2.
Various points for this article were taken from the CIPA website
Information on Political Stability, Economic Growth, and Investment Climate taken from the U.S. Embassy Nicosia
2009 Country Commercial Guide and put together by the Economic and Political Sections (Econ: George F.
Demetriou, Econ/Commercial Officer Jim Carouso, and POL: Anna-Maria Yiallourou)