Stefan Nolte: There is an increasing number of German companies coming to Cyprus

In the second part of CBN’s interview with the President of the Cyprus Germany Business Association (CGBA), Stefan Nolte talks about how the CGBA came to be established, the reasons prompting German companies to relocate or open new offices in Cyprus, and the current economy and business scene.

When was the Cyprus Germany Business Association (CGBA) established and how many members does it currently count?

The CGBA was established in 2008 by the Cyprus Chamber of Commerce and Industry (CCCI). In those years a lot of bilateral business associations were established. Cyprus-China, Cyprus-Russia, Cyprus Slovakia.

Regarding the members, I would like to provide some more information, because we are the only bilateral business association which has made the jump to become a legal entity with the participation of CCCI. All other business associations are under the umbrella of CCCI without having their own legal identity. So, in order to be more efficient, more effective, and to have a louder voice, and in order to plan and realise our projects and events, and the related finances in a more efficient way, we decided to take this step. It cost us some efforts to convince CCCI but in the end it is a founding member and it is also a member on the board.

This change to the legal entity happened in 2019; it was registered with the Registrar of Companies on 21 December (2019). We are registered as a so called company limited by guarantee, not limited by shares but limited by guarantee and in the Cyprus company law, this is a form of company which is used for non-profit organisations. By definition, we are a non-profit organisation.

So, in December 2019 we were registered but then came Covid. So the first two years almost we were not able to do any public activities. But since 2022, March was the first one, we have been doing it and we do it very successfully.

Before we switched to the legal entity, we had 85 members; 21 members came with us into the new form of organisation. So we started with a number of founding members of 21 and now we are 75 or 76, which is quite good and it is rapidly growing; and I guess at the end of the year we will be 90 members. Especially after we have an event, immediately we have 4, 5, 6, 7 new members. I am a member since 2012, with my company Shana Consult, and I am in the Board since June 2016.

Approximately we have five or six events per year. It depends on our own abilities to organise something; we are all voluntarily working. We have one community manager who is employed in Limassol, but apart from that it's all our own voluntary efforts that we put into it.

The association has been announcing an increasing number of new members lately, has there been an increase in German companies opening or relocating Cyprus?

Yes, there has been an increase as with companies from other countries as well. However, the increase of our members is not related to this. Some of the new members are as such, company owners who relocate to Cyprus from Germany. But they're more on the entrepreneur side. Some are self-employed. Some are entrepreneurs having a company employing people. And so there is an increasing number of German companies coming to Cyprus. The main reason for that is the unbearable bureaucratic tax situation in Germany. Just to give you an idea, 16% of the German entrepreneurs, and self-employed business people, are either relocating to anywhere off Germany, or establishing new workplaces, outside of Germany. And another 30% of the entrepreneurs are considering to do the same. There is really something going in Germany.

For example, exit tax. We do have exit tax now in Cyprus, for the past two years or so. But in Cyprus, we have exit tax on companies. In Germany, you have exit tax also on individuals. So if a German national or a company owner wants to relocate to any country, for example, Cyprus, the tax authorities will look into this on a company level, on a personal level, in respect of possible exit tax, and when I say possible, I mean, possible in relation to the amount, not in relation to whether yes or not. There's always exit tax.

And for companies, there was a regulation until the end of 2021 that the tax authorities that assessed the exit tax, kept it on hold for a period of seven years, and if within these seven years you would not return to Germany, then the exit tax was cancelled. If you were to return after five years let’s say, then the remaining two years would be taxed pro rata. This has been changed, since the beginning of 2022, so that exit text is always to be paid and it is due immediately.

So in Cyprus we also have exit tax, as the European Union forced us to.

What sectors are the companies active in?

We have the heavyweights, of course in Cyprus we are strong in the shipping industry. And many shipping companies are German shipping companies, or ex German shipping companies or are shipping companies which are owned by Germans.

So in the association we also have shipping companies. We have IT companies; it is a big sector for companies to relocate to Cyprus for many advantages. We have a large number of law offices with an expanded scope of services like corporate services. And otherwise it's quite mixed, which is good.

Can you name a few of the biggest German companies that have a presence in Cyprus?

One company is the company STIHL and they have been producing chainsaws for more than 100 years. I think they are the largest in the world and they opened an office and a shop here. So as a name, they’re very big. We also have a few names in the IT area.

Allianz Insurance is another one. They did not relocate recently, but they are also a member of ours.

The Columbia hotels are also a member; they have been here for decades. Knauf is a member of ours, it’s a German company. They too have been here for many years. There are quite a few German companies that are members but didn’t relocate recently. SIXT is another company. And these companies mostly opened subsidiaries here, they didn’t relocate as such.

What is it that attracts German companies to Cyprus? How do the two countries’ tax systems compare?

So one thing, obviously, is the difference in tax rates. In Cyprus we have a corporate tax of 12.5%. On taxable profit. I'm saying this because there's a good number of types of incomes, which is not taxable in Cyprus. For example, the income from the disposal of securities in its widest definition, including company shares. When a company holding shares in a company in any other country or in Cyprus is selling the shares after seven years with a good profit, this profit is not taxable. In Germany, it is.

Here in Cyprus, we have 12.5%, in Germany we have a total of around 30%. 15% is a corporate tax. And then there's a so called municipality tax, or business tax, which is raised by the municipalities, to finance the municipality. And depending on how much demand a certain city or area has seen from business and companies, the higher the business tax. So if you look into very remote areas of Germany, where there's nothing more than a few villages and forests, their business tax can be very low down to 12.7% or so. While the big cities often take 17-18%.

But on the other hand, Germany has a very good and very well developed social support system, that costs money. But then over the last years, there has been an increasing cost of wrong planning, and wrong implementations. So the amount of taxpayers’ money wasted is crazy.

So this is a big difference. But on the personal side, in Cyprus, we have a tax free income annually up to €19,500. In Germany, I don't know the number but the number is so small, it's worthless to think about it. Plus, then we have progressive tax brackets of €7,000 to €8,000 each. 20%, 25%, 30% to 35%. And here, in Cyprus, this percentage applies to the amount of salary within that bracket. It does not apply to the entire salary. So if you exceed €19,500 and you have an annual salary of €24,000, the 20% that you pay is only on the €4,500, which is the difference between the €19,500 and the salary. In Germany, the rate for that specific tax bracket if for the entire salary. So, let's say you slip with a few 100 euros’ annual salary into the next higher tax bracket rate, your entire salary will be taxed by that tax rate, which leads to the result that although you get an increase in your salary paid by the employer, you may have less money in your pocket after.

What initiatives is the Cyprus Germany Business Association taking to encourage more companies to come?

I have to say that we do not directly target this area. Our activities are here in Cyprus. We plan maybe for the next year to do an activity in Germany, like a visit to Germany with a delegation or so. But this is very difficult. You have to target a specific industry; it must be well chosen, well discussed and well planned and well-structured and well announced in advanced. In Cyprus, we plan for in a few months. In Germany, they plan for in two years. So this is one obstacle for us. And the other thing, Cyprus is small and you can reach everybody very easily and quickly. Germany is large. And it is a federal country. Therefore, every industry is spread all over Germany. So it’s hard to find spots, cities, where you have a number of companies of a specific industry.

So I have to say we don't do anything to attract companies coming from Germany to Cyprus. We are more a community of business people in Cyprus, be them Cypriots, or Germans or others are welcome as well, who are a part of this business environment in Cyprus and who feel through this or that way related to the Cyprus German Business Association.

What is your view of the economy and current business environment in Cyprus and the EU?

This is a difficult question, or more so, the answer is difficult. So my view on the economy and current business environment in Cyprus; in general, the business environment in Cyprus is good, but we have to specify what we mean by business. The business is very different for retail or for restaurants, or for some small companies than it is for large companies. We don't have a uniform definition for this in Cyprus. In Cyprus we have a lot of inequality, in income and distribution of wealth. So for a good number of companies, business is going very well. But for a large number of companies, business is not doing well.

But you didn’t ask how business was doing, but the business environment. In terms of regulations in general, the environment in Cyprus is good. We are mainly suffering from regulations that are introduced on us by the EU and this is becoming crazier and crazier. And we have to go with this we have no choice. To my opinion, the EU is over-regulated by far and most people are not aware of all the consequences. For example, the harshly increased regulations on banks, which is easily justifiable on the one perspective, is leading to a lack of financing of small and medium enterprises, because the criteria for lending are made harsher by the regulations, and thus the banks are not able to provide a loan to a company easily unless all conditions are met. The bank has no choice and here in Cyprus we have a specific problem because we are a small country and because households in Cyprus are among the three or four most over indebted households in the EU. So there is almost no loan or credit worthiness left. The same goes for many companies. I know companies in Cyprus, I will not say names, famous names, if they would use every year's profits only to pay back their loans, they will need more than 80 years. So this all happened before 2013. The loans were given out like this, those times are over and now the banks are suffering. They have high liquidity and they don't know what to do with the money. And they're also not interconnected with international finance markets, which was an advantage during the Lehman Brothers crisis, because we weren't affected because we are not present on these markets. On the other hand, not being present on the international markets means that we are dependent on our own local market. And if the majority of companies and individuals or households are over indebted, we have no money or only a few to whom we can lend our money.

Plus, in Cyprus, we lack investment opportunities. What we offer most is real estate. There should be more diversification and there should be diversification into the direction of creating value added.

But in Cyprus we have no vision or mission and no given direction by the government in the form of policies announced that would pave the way for producing countries to come to Cyprus.

Do you believe the war in Israel will impact business in the region?

There will be some effects here. But in general, for companies, businesses that are not related to exports to that area, or to imports from this area, and those companies are minimal, it will have no effect. In the middle term, I don't know, nobody can predict because the current situation may lead to a reordering of power in the region. But who will win this game and who will lose, if there will be such a change, this will become obvious in the next three to five years at its earliest.