Cyprus PIO: Cyprus FM on the Accession of Cyprus to the EU, 96-10-26

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From: The Republic of Cyprus Press and Information Office Server at <http://www.pio.gov.cy/>

Cyprus accession to the European Union; Implications for the financial and services sector

by Mr Alecos P. Michaelides, Minister of Foreign Affairs

I would like to congratulate the Employers and Industrialists Federation of Cyprus for its initiative to organise CyServ as an annual forum which offers a great venue to professionals from so many countries, to come to Cyprus and discover the possibilities that our country offers in the field of Services.

I wish to thank them for offering me the opportunity to address such a distinguished gathering and share with you, our views concerning the European course of Cyprus, with a special focus on the prospect of not merely maintaining our role as a Services Centre, but more so of advancing it even further.

During the last three and a half years, we have devoted a lot of our time and energy in promoting the accession of Cyprus to the European Union. I recall when I was preparing my address to the House of Representatives, the Director of my Office checked and found that since I became Foreign Minister I had paid 85 visits to European Union capitals.

We aspire to become members of the European Union because we share the same history, culture, values, identity and character. We share the aspiration that the European Union can play a leading role in moulding the Europe of tomorrow and contribute significantly in shaping the landscape of the Mediterranean region. Our vision and our aspiration is to be part of this Europe of tomorrow.

Some thought that perhaps our eagerness to embark on the accession process, was because we either wanted to abandon our efforts for finding a solution to the Cyprus problem, or that we were totally frustrated.

Our position is made absolutely clear both during private meetings, as well as in public statements. Yes, we do aspire to see Cyprus becoming a member of the European family. But our deep agony which is growing day by day, is to see an end to the Cyprus problem. An end to the division of our land and the separation of our people. We consider that the prospect of joining the European Union can become a catalyst for solving our problem.

It is exactly for this reason that we have repeatedly stated that the most appropriate time for solving the Cyprus problem is now, the interim period until accession negotiations start.

Ladies and Gentlemen,

Cyprus´ ties with the European Union go back to 1972, with the signing of the Association Agreement with the European Community, followed by the signing of the Protocol in January 1987, which provides for the setting of a Customs Union.

In 1990, Cyprus submitted its application to join the European Community.

When I took over my duties as Foreign Minister, on March 1st, 1993, following the declared european policy by President Clerides, I decided that my first trip would be to Brussels. During that first visit I had a long and extremely constructive dialogue with Commissioner Mr Hans Van den Broek.

From that moment onwards, we have achieved a series of milestone developments that have placed Cyprus on a clear course leading to future accession.

First: On 30 June 1993, the Commission issued its Opinion confirming that Cyprus is eligible for accession.

Second: On 4 October 1993, the General Affairs Council asked the Commission to enter into substantive talks with the Government of Cyprus, to help us prepare for the accession negotiations.

Third: In 1994, two successive European Councils, that of Corfu and Essen, stated that the next enlargement of the European Union would involve Cyprus and Malta.

Fourth: On 6 March 1995, the Council of the European Union decided that the Union would start accession negotiations with Cyprus six months after the conclusion of the IGC.

From that moment Cyprus accession process began in earnest. It is now expected that during 1997 the Intergovernmental Conference will be concluded, which means that we should expect to commence accession negotiations sometime at the end of 1997, and most likely, at the beginning of 1998. Projecting to the future, the accession should be expected around year 2000.

The prospect is open and it is our responsibility to prepare as well as we can, for successfully entering the negotiation process.

Let me say that considerable work is already accomplished in the harmonisation process as a result of the efforts of the Ministries involved and of the 22 working groups that we have set up. Our ambition is that when accession negotiations commence, most of the ground would be covered and thus we could shorten the time required for the negotiations.

Ladies and Gentlemen,

We recognise that the Financial services Sector, is indeed a very important one for our economy. Within this context, the offshore business play a major part and its importance is constantly growing. The initial offshore regime was introduced in 1975. The philosophy behind it was to provide such tax advantages that would attract companies to set up their offices in Cyprus.

The growth of offshore business has been really spectacular. More than 25,000 offshore companies are registered, generating an annual income of more than 161 million Cyprus pounds and employing about 2% of our work force.

Assessing this spectacular growth at this moment, one can identify that the reasons that attracted so many firms to Cyprus, were not merely the tax considerations.

The privileged geographic position of the island is a definite attraction. Proof of it is the fact that many of these companies have business interests in the Middle East. The high quality of Services, meeting fully the European standards, provide a very definite advantage for the smooth operation of these companies.

Our market economy, our legal system, the democratic institutions, the high standard of communications, the highly skilled staff available, the social environment, all these factors together, have contributed to making Cyprus a very attractive base for offshore business.

It is obvious that the future accession of Cyprus to the European Union may raise certain questions, bearing in mind that harmonisation may touch issues that are of interest to the offshore business. For example, the full implementation of Community rules on VAT, entails the uniform and generalised application of that tax on a member country. Also, Community rules prohibit discrimination on grounds of nationality. And those which restrict state aids will have to be taken into account in one way or another.

Therefore, we face two important challenges: on the one hand we have our commitment to accession and thus the need for early harmonisation, and on the other hand it is extremely important for us that Cyprus should maintain its role as a Financial and Services Centre. These targets are not conflicting. Therefore our task is to find the right solutions to problems that arise.

Let me assure you that this matter is already under serious study and I am confident that answers will be found.

This optimistic attitude is not based simply on the realisation that the offshore regime is of too great importance for Cyprus to risk it, but also because, looking at special cases in some of the present member-states of the European Union, we see that solutions to similar problems were found.

Let me make reference to some examples: The Dublin International Financial Services Centre and the Free Trade Zone of Madeira are very interesting cases. They prove that exemptions from the application of Community law may be granted and thus special institutions may function quite successfully within the European Union. Both, Dublin and Madeira are part of the European Union territory and, yet, they have obtained exemptions from specific Community rules, mainly those concerning VAT and state aids.

This was as a result of decisions of the Commission, initially adopted in 1985 and 1986, respectively, and renewed since, until the year 2011. The length of the derogations in this case was more than 25 years and the experience until now clearly indicates that the derogations most likely will be further renewed.

It is important to note that on the basis of these exemptions and derogations, the legislation in effect in the Dublin International Financial Services Centre and in the Free Trade Zone of Madeira, allow offshore companies establishing in these territories to enjoy tax privileges which are not different in nature from those enjoyed by Cyprus offshore companies.

The case of Luxembourg is also interesting. This country's tax incentives provided to foreign but also, at least theoretically, to local investors, make use of the fact that direct taxation is not harmonised with the European Union.

Without distinguishing between offshore and onshore companies, Luxembourg has a very favourable tax regime for holding companies, this regime being in total conformity with Community law. This regime, combined with very strict rules on Bank confidentiality, provides a favourable environment for investors.

I have stated the above, to underline that, our task is to find solutions to the problems that may arise, because solutions are possible.

Concluding, let me state the following:

Our accession to the European Union is definitely a great challenge for us. Therefore, we are speeding up the harmonisation process so that the accession negotiations will be smooth and short.

Harmonisation does not merely refer to the public sector, but, equally important, is the familiarisation with the acquis by the private sector.

Problems and difficulties we will find, not only regarding the offshore regime, but for other sectors too. Our task, whether it is the Government or the private sector, is to find solutions to the problems. And, I want to assure you that the Government is determined to take all necessary steps to ensure that Cyprus will not only remain but will further be enhanced as a Services Centre and an Offshore Business Centre.

In seeking solutions to problems that may appear, we have to study the experiences of the 15 members of the European Union. Use the knowledge and expertise that is so abundantly available for all matters related to the European Union.

Let me say that the European Institute will soon start operation. Its library, which will be a European Documentation Centre, will be open to all, for information on European matters. Its specialists and researchers will provide appropriate advice and guidance.

Dear friends,

Cyprus is an island state. But we have to realise that the sea that surrounds us is not a wall of isolation. It is a bridge to the outside world. A bridge to Europe. And, when we join the European Union, we will live in a competitive environment where the question is not how to provide protection but how to identify the prospects and opportunities.

In the process of harmonisation of our institutions, our economy and our legislation, we must recognise the need to harmonise our attitudes too. Therefore let us put aside notions of protectionism and isolation, learn to live and succeed in a competitive world and face the challenge: to be a member of the Europe of tomorrow.

(Address by Mr Alecos P. Michaelides, Minister of Foreign Affairs at a luncheon by the Employers and Industrialists Federation of Cyprus, on the occasion of CYSERV, Nicosia, 26 October 1996)

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