Debt Recovery in Cyprus: Balancing between holding companies and p.o. boxes

Despite being a rather small country in terms of size, over the last decades, Cyprus has become a major spot for companies that trade within the Mediterranean area or wish to reach out to the East. The country has suffered some quite harsh political crises (incl. those known as the Cypriot issue) and a recent economic recess in 2013; but has shown a remarkable rebound since then.

The upsides are plenty; modern infrastructure, a pool of workforces, an easy and fast model of business and a corporate tax rate of 12,5% -among the lowest in Europe.

However, no matter how attracting the Cypriot environment might seem, there are still risks that should draw the attention of foreign businesses.

First things first, Cyprus is primarily a common law jurisdiction, in the sense that private and procedural law is entirely based on Anglo-Saxon law, whereas the rest, such as public, family, property law are influenced by civil (Greek) law. The judicial system is fairly just and transparent. Court proceedings against defaulters usually start with the filing and serving of an «action». Legal costs may be charged to the defeated party, but often, not fully, as this lies at the discretion of the court. Costs are mostly awarded on the basis of a predefined scale, on the basis of the value of the claim and the stage of the procedure. The Supreme Court publishes tables of scales which show the amount of costs that are refundable. Claimants that start a procedure in Cyprus, may have to cover a significant part of the costs by themselves.

Since court proceedings come at a certain cost, out-of-court settlement is a common way of collecting a claim. Demand letters are often sent out, allowing a term for ultimate payment within 7 or 10 days. Collection costs at this stage are rarely charged, unless contractually agreed. English is the generally accepted language for international business, therefore, usually Cypriot businesses will be able to understand the content of a demand letter drafted in English. However, the judicial system is entirely conducted in Greek, so in the end, hiring a «Greek advocate» (the term for Cypriot lawyers) is unavoidable.

Finally, in Cyprus there is a general limitation period of 10 years, after which, no action is allowed. There are, however, special provisions, such as for claims deriving from a contract (6 years) or concerning the fees of an independent professional (3 years).

Cyprus is considered to be an ideal ‘’holding entity’’ jurisdiction, which may allow for investing opportunities, but also bring certain drawbacks to the market of debt recovery. Local entities are extremely easy to set up, within a couple of days and with only a low amount of capital as a starting point. That means that often there is no genuine corporate activity within the jurisdiction, no assets to apply pressure to, or to liquidate.

Therefore, parties that trade with Cypriot companies should exercise an advanced level of care and, in the end, might have to address awkward questions such as; is there an actual office in the registered address, is there any genuine business activity, or just a «P.O. box» handled by an auditor, hired solely for tax and accounting reasons. Knowing your customer is of extreme importance. Which is in the end, is an important area of concern for all companies that engage in international business, not only in Cyprus but to other jurisdictions throughout the globe as well.