Transparency of the Regulatory System
Republic of Cyprus
The ROC achieved a score of 4 out of 6 in the World Bank’s composite Global Indicators of Regulatory Governance score (based on data collected December 2015 to April 2016) designed to explore good regulatory practices in three core areas: publication of proposed regulations, consultation around their content, and the use of regulatory impact assessments. For more information, please see: http://rulemaking.worldbank.org/en/data/explorecountries/cyprus .
U.S. companies competing for ROC government tenders have noted concerns about opaque rules and possible bias by technical committees responsible for preparing specifications and reviewing tender submissions. Overall, however, procedures and regulations are transparent and applied in practice by the government without bias towards foreign investors. The ROC actively promotes good governance and transparency as part of its administrative reform action plan: http://www.reform.gov.cy/en/ .
In line with the above plan and EU requirements, the ROC launched in 2016 the National Open Data Portal (www.data.gov.cy ) to increase transparency in government services. Government agencies are now required to post on this portal publicly-available information, data, records, on the entire spectrum of their activities, for use, including commercial use, by the public. The number of data sets available through this portal has been growing rapidly in recent months.
Several agencies and non-governmental organizations (NGOs) share competency on fostering competition and transparency, including the ROC Commission for the Protection of Competition (www.competition.gov.cy ), the Competition and Consumer Protection Service, under MECI (http://www.consumer.gov.cy/mcit/cyco/cyconsumer.nsf/page03_en/page03_en?OpenDocument ), the Cyprus Consumers Association (www.cyprusconsumers.org.cy ), and the Cyprus Securities and Exchange Commission (www.cysec.gov.cy ).
Most laws and regulations are published only in Greek and obtaining official English translations can be difficult. When passing new legislation or regulations, Cypriot authorities follow the EU acquis communautaire. A formal procedure of public notice and comment is not required in Cyprus, except for specific types of laws. In general, the ROC will seek stakeholder feedback directly. Draft legislation must be published in the Official Gazette before it is debated in the House to allow stakeholders an opportunity to submit comments. The ROC House of Representatives typically invites specific stakeholders to offer their feedback when debating bills. Draft regulations, on the other hand, need not be published in the Official Gazette prior to being approved.
In an effort to contribute to global tax transparency, the ROC has adopted the Standard of Automatic Exchange of Information developed by the Organization for Economic Co-Operation and Development (OECD) known as Common Reporting Standard (CRS). Since January 1, 2016, the ROC Tax Department requires all financial institutions to confirm their clients’ jurisdiction(s) of Tax Residence and Respective Tax Identification Number, if applicable. Additionally, the ROC has signed the U.S. Foreign Account Tax Compliance Act (FATCA), allowing Cypriot tax authorities to share information with U.S. counterparts.
Public finances and debt obligations are published as part of the annual budget process.
Area Administered by Turkish Cypriots
The level of transparency for “lawmaking” and adoption of “regulations” in the “TRNC” lags behind U.S. or EU standards. There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. Draft legislation or regulations are made available for public comment for 21 days after the legislation is sent to “parliament.” Almost all legislation and regulations are published only in Turkish.
International Regulatory Considerations
Republic of Cyprus
As an EU member state since May 1, 2004, the Republic of Cyprus must ensure compliance with the acquis communautaire — the body of common rights and obligations that is binding on all EU members. The acquis is constantly evolving and comprises of Treaties, international agreements, legislation, declarations, resolutions, and other legal instruments. EU legislation, for its part, is subdivided into:
- Regulations, which are directly applicable to member states and require no further action to have legal effect;
- Directives, which are addressed to and are binding on member states, but the member state may choose the method by which to implement the directive. Generally, a member state must enact national legislation to comply with a directive;
- Decisions, which are binding on those parties to whom they are addressed;
- Recommendations and opinions, which have no binding force.
When there is conflict between European law and the law of any member state, European law prevails; the norms of national law have to be set aside, under the principle of EU law primacy or supremacy.
Legal System and Judicial Independence
Republic of Cyprus
Cyprus is a common law jurisdiction and its legal system is based on English Common Law, in both substantive and procedural matters. Cyprus inherited many elements of its legal system from the United Kingdom, including the presumption of innocence, the right to due process, the right to appeal, and the right to a fair public trial. Courts in Cyprus possess the necessary powers to enforce compliance by parties who fail to obey judgments and orders made against them. Public confidence in the integrity of the Cypriot legal system remains strong, although long delays in courts, and the perceived failure of the system collectively to punish those responsible for the island’s financial troubles have tended to undermine this trust in recent years. The Council of Europe’s GRECO called for judicial reforms to build confidence and trust (see: https://www.coe.int/en/web/greco/-/cyprus-makes-promising-moves-to-fight-corruption-but-many-results-yet-to-materialise-says-anti-corruption-group ).
International disputes are resolved through litigation in Cypriot courts or by alternative dispute resolution methods such as mediation or arbitration. Businesses often complain of court gridlock and judgments on cases generally taking years to be issued, and even more for claims involving property foreclosure.
Area Administered by Turkish Cypriots
Investors should note the EU’s acquis communautaire is suspended in the area administered by the Turkish Cypriots.
The “TRNC” is a common law jurisdiction. Judicial power other than the “Supreme Court” is exercised by the “Heavy Penalty Courts,” “District Courts,” and “Family Courts.” Turkish Cypriots inherited many elements of their legal system from the British colonial rule before 1960, including the right to appeal and the right to a fair public trial. There is a high level of public confidence in the judicial system in the area administrated by Turkish Cypriots. The judicial process is procedurally competent, fair, and reliable.
Foreign investors can make use of all the rights guaranteed to Turkish Cypriots. Commercial courts and alternative dispute resolution mechanisms are not available in the “TRNC.” The resolution of commercial or investment disputes through the “judicial system” can take several years. The Turkish Cypriot administration has trade and industry “law” and contractual “law.” The Turkish Cypriot administration has several trade and economic cooperation agreements with Turkey. For more information about “legislation,” visit http://www.yaga.gov.ct.tr .
Laws and Regulations on Foreign Direct Investment
Republic of Cyprus
Below are links to various publications and laws affecting incoming foreign investment:
Area Administered by Turkish Cypriots
Visit the “YAGA” website, for more information about laws and regulations on FDI: http://www.yaga.gov.ct.tr .
Competition and Anti-Trust Laws
Republic of Cyprus
The oversight agency for competition is the Commission for the Protection of Competition: www.competition.gov.cy
Area Administered by Turkish Cypriots
The oversight “agency” for competition is the “Competition Board:” http://www.rekabet.gov.ct.tr/ .
Expropriation and Compensation
Republic of Cyprus
Private property may, in exceptional instances, be expropriated for public purposes, in a non-discriminatory manner, and in accordance with established principles of international law. The expropriation process entitles investors to proper compensation, whether through mutual agreement, arbitration, or the local courts. Foreign investors may claim damages resulting from an act of illegal expropriation by means other than litigation. Investors and lenders to expropriated entities receive compensation in the currency in which the investment was made. In the event of any delay in the payment of compensation, the Government is also liable for the payment of interest based on the prevailing six-month LIBOR for the relevant currency.
The 2013 “Bail-In” of Bank Depositors: Following the 2013 financial crisis and as part of the Memorandum of Understanding between the Republic of Cyprus and international lenders (European Commission, European Central Bank and the IMF), depositors in two Cypriot banks were forced to exchange some of their deposits into equity shares in the banks. This “haircut” sparked 3,000 lawsuits against the ROC and the banks. Some of these lawsuits have been rejected by EU courts, while most remain unresolved. Additionally, recipients of this “haircut” have filed a class- action suit against various European bodies at the General Court of the European Union, while similar disputes are still pending before the World Bank’s International Centre for Settlement of Investment Disputes and the Paris-based International Chamber of Commerce (ICC) International Court of Arbitration. The ROC set up a solidarity fund in 2017, aimed at helping depositors who lost money in the “haircut,” although it is still unclear how this will work in practice. In September of 2016, the European Court of Justice (ECJ) ruled that adoption of the Memorandum of Understanding (MOU) was not an unlawful act, and dismissed actions for compensation. European Central Bank in its 2017 annual report noted that it did not expect any losses from four lawsuits filed against it and other EU bodies by depositors, shareholders and bondholders of Cypriot banks.
Area Administered by Turkish Cypriots
Private property may be expropriated for public purposes. The expropriation process entitles investors to proper compensation. Foreign investors may claim damages resulting from an act of illegal expropriation by means other than litigation.
In expropriation cases involving private owners, they are first notified, the property is then inspected, and, if an agreement is reached regarding the amount, then the owner is compensated. In cases where the owner declines the compensation package, the case relegated to local “courts” for a final decision.
Dispute Settlement
Republic of Cyprus
ICSID Convention and New York Convention
The ROC is a member state to the Convention on the International Centre for the Settlement of Investment Disputes (ICSID Convention), and a signatory to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
Investor-State Dispute Settlement
There have been no reports of investment disputes in Cyprus involving U.S. persons over the past 10 years, and there is no history of extrajudicial action against foreign investors. Local courts recognize and enforce foreign arbitral awards issued against the government.
International Commercial Arbitration and Foreign Courts
Cyprus offers several different means of Alternative Dispute Resolution (ADR). However, recourse to ADR is not common. Some of the entities offering ADR are the following:
Additionally, the ROC Ministry of Justice and Public Order maintains a publicly-available Register of Mediators for both commercial and civil disputes: http://www.mjpo.gov.cy/mjpo/mjpo.nsf/All/64BC1F595AB40EB6C22579AD00346FE2?OpenDocument&highlight=mediation .
EU citizens and businesses can also use SOLVIT, a free, online service, to resolve problems pertaining to internal EU market issues, like visa and residence rights, pension rights, and VAT refunds, within 10 weeks from the day the problem is reported: http://ec.europa.eu/solvit/what-is-solvit/ .
Under the Arbitration Law of Cyprus, if the parties are unable to reach a settlement an arbitrator can be appointed. Arbitration rulings are fully enforceable and the court may settle an arbitral award in the same way as a judgment. Mediation is not fully enforceable, unless the settlement agreement explicitly stipulates that the parties can apply to court for enforcement. The ROC honors the enforcement of foreign court judgments and foreign arbitration awards. Domestic legislation on binding international arbitration is modeled after internationally-accepted regulations, such as the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, which the ROC adopted in 1985. Cyprus’ bilateral investment treaties with several countries also include dispute settlement provisions (see Section 3, Bilateral Investment Agreements).
Area Administered by Turkish Cypriots
Investor-State Dispute Settlement
Foreign investors can make use of all the rights guaranteed to Turkish Cypriots. Alternative dispute resolution mechanisms are not available in the “TRNC.” The resolution of commercial or investment disputes through the “judicial system” can take several years.
Bankruptcy Regulations
Republic of Cyprus
In 2015 the ROC parliament approved a new package of insolvency laws to overhaul existing bankruptcy procedures and help resolve the island’s very high levels of NPLs. Bankruptcy procedures can be initiated by a creditor through compulsory liquidation or by the debtor through voluntary liquidation. The court can impose debt rescheduling, in cases where aggregate liabilities do not exceed €350,000 (USD 385,000) and individuals with minimal assets and income may apply to the court via the Insolvency Service for a debt relief order of up to €25,000 (USD 27,500). Discharge from bankruptcy is automatic after three years, provided all debtor assets are sold and the proceeds distributed to creditors. Fraudulent alienation of assets prior to bankruptcy and non-disclosure of assets draws criminal sanctions under the new legislation. Cypriot authorities are closely monitoring implementation of the new insolvency framework. In March 2018, the government and political parties agreed to set up a committee of experts to forge a new national strategy on how best to deal with the persistent problem of NPLs. NPLs decreased considerably in 2018 mainly due to the collapse of the Cyprus Cooperative Bank (CCB), which transferred bad assets from the banking system to a separate public entity. NPLs declined from 42 percent of gross loans at the end of 2017 to 32 percent at the end of November 2018.
The World Bank’s 2019 Doing Business report ranked Cyprus 26th from the top among 190 countries in terms of the ease with which it resolves insolvency. For additional information, please see: http://www.doingbusiness.org/data/exploreeconomies/cyprus#resolving-insolvency .
Area Administered by Turkish Cypriots
In 2013, the “TRNC” passed a debt restructuring “law” aimed at providing incentives to restructure debts and NPLs separately. Turkish Cypriots also have a bankruptcy “law” that defines “collecting power;” conditions under which a creditor can file a bankruptcy application; and the debtor’s bankruptcy application, and agreement plans. In December 2018, NPLs had reached USD 187 million (1.045 billion Turkish Lira).
