Cyprus–A Growing Market for Franchising
March 2010 Franchising World
Cyprus’ prudent Central Bank and conservative bankers have shielded it from the excesses of other financial centers.
By Ephie-Yvonne Charlambidou
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 2004 and a member of the Euro-Zone since 2008 Cyprus also enjoys excellent business relations and flight connections with the Middle East. Despite the recent worldwide economic downturn, Cyprus’ 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 U.S.$30,744 in 2008. With the lowest corporate tax rate in the European Union at only 10 percent, the island is an ideal jurisdiction for holding companies. Moreover, it has over 40 bilateral tax treaties, including 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 multi-lingual 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 airroutes 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 percent of the EU fleet) and nearly 2,000 vessels. It constitutes one of the largest ship-management centers in the world with around 50 ship-management companies and marine-related foreign enterprises that conduct their international activities in the country.
U.S. franchises, particularly those in the food business, have been extremely successful in Cyprus in recent years. Companies that opened franchise outlets in Cyprus since 1990 include McDonald’s, Burger King, Starbucks, Coffee Beanery, Pizza Hut, Papa John’s Pizza, KFC, Bennigan’s, TGI Friday’s, Orkin and Curves. Century 21, RE/MAX and ERA have also opened offices on the island. The most recent opening on the island is Cinnabon. Moreover, Taco Bell opened its first store in Limassol in 2009 and is planning to open a second store in Nicosia this year.
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 two to three 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, semi-governmental organizations and the large financial services sector. Cypriots tend to be big spenders by nature and have an affinity for foreign products.
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. 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.” 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 intercommunal 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 2003 has allowed movement of persons£ more than 11 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 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.
Cyprus has an open, free-market, services-based economy with some light manufacturing. As noted earlier, Cyprus’ accession as a full member to the European Union as of 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 percent of the GDP and employs 8.2 percent of the labor force. Industry and construction contribute 18.3 percent and employ 20.5 percent of the labor force. The services sector, including tourism, contributes 79.3 percent to the GDP and employs 71.1 percent 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 percent 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 percent of its imports come from the European Union, particularly Greece, Italy, and the United Kingdom, while 1.7 percent 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 percent in the 1980s, to 4.4 percent in the 1990s, to 3.6 percent from 2000 to 2008. In recent years (2007 and 2008) growth has remained fairly strong at around 4.4 percent and 3.8 percent. Cyprus is the only country in the Eurozone that expected positive growth in 2009, although it is forecast to remain barely above zero (0.3 percent) 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 percent in 2008 but is expected to drop to around 0.9 percent 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 percent, although this is considerably higher than the 3.8 percent recorded in 2008. Public finances have been in a fairly good shape in recent years, with an almost balanced budget (1.0 percent surplus in 2008, and an estimated 0.8 percent deficit in 2009) and relatively low public debt (49.3 percent of GDP in 2008 and on its way down).
Cyprus has been a successful member of the Eurozone since 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.
In the run-up to EU accession (May 2004), Cyprus dismantled most investment restrictions, attracting increased flows of foreign direct investment, particularly from the European Union. 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 “World Investment Report 2008,” Cyprus ranks among the world’s leading countries per capita in terms of attracting foreign direct investment. 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 million in 2008 or 1.0 percent of Cyprus’ total inward foreign direct investment. 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.
Ephie-Yvonnie Charalambidou is a commercial specialist with the U.S. Embassy, Cyprus. For additional information on doing business in Cyprus, contact the U.S. Embassy in Nicosia at 357-2239-3520, e-mail firstname.lastname@example.org or visit www.buyusa.gov/cyprus.
1. Various points for this article were taken from the CIPA Web site. 2. 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)