Because Turkish Cyprus is recognized as a sovereign nation by no other nation besides Turkey, it has attracted little foreign investment. The majority of factories are owned by domestic companies but, in most of the major industrial concerns, there has been considerable British and Greek capital. The central government encourages foreign investment that results in the import of new technology or new production methods and improves the quality of the goods produced, especially for export. Any purchase of shares in a domestic company by nonresidents requires approval by the Central Bank of Cyprus.
As part of its accession to the EU, expected in 2004 barring untoward events, Cyprus has endeavored to transform itself from an off-shore tax haven, featuring a 4.25% corporate tax rate for ring-fence businesses (that is, those having no trade inside Cyprus) to a what it calls a tax incentive country, free from the suspicion usually associated with tax havens. Under the new tax code effective as of effect 1 January 2003, foreign companies already enjoying the tax haven 4.25% (in 1996, for instance, there were some 1,168 offshore companies operating out of Cyprus) can continue to do so until the end of 2005, provided they have not trade inside Cyprus.
Other companies will receive for the most part national treatment, which features a competitive corporate tax rate, (of 19.45% instead of the highest income rate of 25% through the way the income and withholding taxes are combined) but not an offshore rate. In the accession process (or acquis ), Cyprus has been under intense scrutiny for money laundering. Its anti-money laundering law of 1996 was amended in 1999 to satisfy enforcement concerns. As of 2002, both the IMF and the OECD's Financial Action Task Force on Money Laundering (the TATF) have certified Cyprus as satisfactory on this count.
Cyprus has not been removed, however, from the Flags of Convenience (FOC) black list of the Paris Memorandum of Understanding on Port State Control, known as the Paris MOU, which is an agreement among 19 countries aimed at eliminating substandard shipping. Historically, Cyprus has operated the fourth- or fifth-largest maritime fleet through offering lax safety and inspection regimes on ships registered under its flag. From 1999 to 2001, there were signs of improvement, according to EU reports. The percent of Cyprus-flagged vessels detained by Port State control dropped from 9.97% in 1999 to 8.85% in 2001, compared to an EU average of 3.14% in 2001. In all, 397 of 4,100 Cypriot ships were detained. To move up to the Paris MOU's "grey list," no more than 319 or 7.7% of Cypriot vessels should have been detained. In June 2002, Georgia instituted a new ship safety and inspection law to help improve its record. Also as part of the accession process, Cyprus has instituted more a liberalized investment regime, removing interest rate ceilings and capital controls.
The government first made changes in the investment code to encourage foreign investment in 1986, but many restrictions remained. In 1996, the investment code was liberalized to allow foreign participation of up to 49% in Cypriot companies. Certain services were allowed 100% foreign participation. Sector specific restrictions remain, however, in several important areas including electricity, tourism, and air transport and travel offices. The telecommunications sector, also, has not been privatized. To date the inflow of foreign direct investment (FDI) has remained small, averaging 1.3% of GDP 1997 to 2001. The trend, however, is toward an increase. FDI as a percent of GDP doubled during this period, fro9% of GDP in 1997 to 1.8% of GDP in 2001.