Smaller companies in the professional services sector can now take advantage of their flexibility and adaptability, says the CEO of Prospectacy.

Last month, the New York Times published an article about Cyprus in which Vasilis Zertalis, CEO of the corporate services provider Prospectacy was quoted extensively. His optimistic outlook for 2014 and the firm’s expansion plans helped give a positive spin to the whole NYT story but just now representative is his company of the broader sector?

“I would say that we are representative of the smaller offices,” he told me in his office in central Nicosia. “The big and mid-size companies have had to shrink but for firms like ours it’s easier to handle costs, manage prices and expand as required. If a ‘Big Four’ firm needs to register 1,000 companies to feel that it has had a good year, we will say that for 50 or 100. It’s easier for smaller operations to get out there, to go and see people and to form partnerships. I think the larger firms have been more involved in damage control over the past couple of years rather than trying to expand further and create new markets.”

Prospectacy was set up in 2009 by Zertalis and a partner, both of whom had worked for KPMG and other audit firms before deciding to form their own company. “The crisis hadn’t yet hit Cyprus at the time, though plenty of people were telling us that it was not a good time to start a business and hard times were on the way,” he recalled, “But if you’re confident you take your chances and that’s what we did. Our core business is tax planning, mostly for companies, and everything else is built around it. And, in spite of everything that has happened in the past 12 months, we’ve managed to do well.”

Zertalis was quoted in the New York Times article as saying that “The Russians won’t leave because they really don’t have any other option. They lost money in the haircut, but when it comes to business they will continue to use the island because returning to Russia is not a better solution for them.” 

Is this really the case? He certainly believes that it is and he argues that, although there are plenty of Russians and Russian companies in Cyprus, most of their money was always somewhere else. “We are talking about trillions of euros, not the oft-quoted figure of €30 billion. What was in Cyprus was a very small percentage,” he insisted. And he went on: “I don’t see our relationship with Russia lasting forever. What has been going on all these years will stop. It is clear that President Putin wants to find a way of keeping Russian money in Russia. I am sure that Russians will still live here and buy property, etc. because it’s not only the tax system that attracts them to the island. It’s the whole environment and the way of life, so Cyprus will continue to be on their list of destinations for buying a holiday home, and so on, but the professional services sector needs to look elsewhere”

Zertalis believes that the Government needs to focus on drawing up Double Taxation Treaties with other countries rather than simply retaining and maintaining existing economic and financial relationships.

“Not everyone is in crisis. There are countries that are growing and we should go after them. There are plenty of markets in Asia and Latin America, for example, that will see Cyprus as a gateway to the much bigger European market.”

While firms such as Prospectacy are not going to sit around and wait for government action, Zertalis acknowledges that Double Taxation Treaties help.
“They are an additional tool for us and they definitely give us a competitive advantage,” he said. 

On the other hand, he does not foresee the Government’s rumoured efforts to attract foreign banks to Cyprus bearing fruit in the near future.

“I’ve heard the rumours but my main question is why any foreign bank would want to establish itself in Cyprus at this moment. There isn’t much of a local market to penetrate and those that are here have been downsizing and even closing branches,” he told Gold. “It’s possible that a big name might decide to come here and enter the retail market, open lots of branches and guarantee that people’s money would be safe. But even then, it would come under the Central Bank’s regulation so nothing would be 100% certain. Frankly, I don’t see any reason for a foreign bank to open at this time.”

It’s well-known that in recent years, most of the money that came to Cyprus – including the much-talked-about Russian money – never stayed here but simply passed through and that, in Vasilis Zertalis’ view is “just one of the many mistakes that our bankers have made. They never managed to create the product that would have kept this money on the island. Even some of those who were sending their money to Switzerland were doing it through Cyprus. Of course, Switzerland has a longstanding traditional banking system so why couldn’t we do the same? It’s not possible now, obviously.”

If foreign banks are hesitant to set up operations at this time, what about investors in other sectors? Are they looking at Cyprus as a place where they can pick up cheap distressed assets or do they believe in the essential reliability of the country with all the advantages that we have always advertised?

“The vultures are already here of course!” Zertalis replied with a laugh, “and the rumour going around is that everything here is for sale at the right price. There is interest on the basis of both of the scenarios you suggest but in either case the price has to be low because of the perceived risk. Cyprus is not London where anyone investing in a property market that is down knows that it will eventually recover. We have been involved in a couple of deals and we’ve seen that if you drop your price by 10% nobody is interested. If you drop it by 20% they are still not interested. So it ultimately comes down to how low the seller is willing to go. Things in the real estate market are quite tough right now. As for the citizenship scheme, I don’t think that people are going to come and buy a property just for that purpose.”

One year on since March 2013, how does Vasilis Zertalis feel about the prospects for both the local economy and the investment environment?

“I feel positive about this year, he replied firmly. “I don’t think the economy is going to crash but we are still unstable. We can’t be sure that MPs aren’t going to decide to say ‘That’s enough’ and refuse to pass legislation that is part of the agreement we have signed with the Troika. As long as we have instability I don’t see how people will be persuaded to invest. They may trust the present government more than the previous one because it has taken action but the political system and the economy remain unstable. The banking system is still unable to finance the needs of the market in the way it used to and this will take some time.”

That doesn’t sound like an optimistic point of view.

“No, it is. I believe that what happened 12 months ago was necessary. We have been forced to take measures that we didn’t have the courage or the political will to take by ourselves. Obviously there are negative factors in some of the Troika’s demands and I can understand both the people that are protesting and the Government which is trying to find a compromise. But we don’t need such situations to create even more instability – the issue of privatisation, the fact that one of the parties has withdrawn from the government, etc. If we didn’t have to deal with these things I wouldn’t hesitate to say that 2014 will be a good year. But current events and others down the road are creating instability and scaring people away. Investors who have forgotten about 2013 and are looking at Cyprus with fresh eyes are going to stay away for even longer when they see what’s happening. And it won’t take much for someone to say that maybe they should be looking elsewhere to make their investment.”

Under such circumstances, how easy is it to convince investors that Cyprus is a better jurisdiction than, say, Malta or the Netherlands for them to do business?

It’s not easy, Zertalis said, noting that Malta, in particular, started after Cyprus but has now surpassed us in many areas. “We were stuck in our traditional views for a long time and since the work kept coming in, nobody really felt the need to develop our product and make it better for the future. That’s why Malta is now at least one step ahead of us in so many areas,” he said. “I think Malta is now going through what Cyprus did in the late 1990s,” he added. “Business is coming in, it thinks that one of its main competitors is out of the game so it’s comfortable and we are the ones who are having to make the effort to get business. This will change eventually.”

On the question of persuading investors that Cyprus still has considerable advantages over competing jurisdictions, Zertalis said that there is greater resistance than before on their part but benefits such as the large network of double tax treaties and the country’s highly-qualified professionals eventually play a positive role. Attracting new business is not easy but by making personal contact and going after it, Cypriots are now doing more than their competitors elsewhere. “It used to be said that Cypriot banks were not professional in their dealings and that they were very expensive compared with others internationally,” he said. “Now that we’re working with foreign banks, we realize how good and efficient the Cyprus banking system actually was. I believe that many companies and individuals that left last year will come back to Cyprus and they will keep using us for tax planning and other business purposes.” 

So how optimistic is the CEO of Prospectacy about Cyprus’ long-term future? 

“I feel positive about the future because what happened served as a wake-up call,” he said. “We are now trying to fix things, to change things, to be proactive and to create new products. The Cyprus Securities and Exchange Commission (CySEC), for example, is very active and is now very fast to implement EU directives and regulations. We need to create new markets before Russia decides to close the door on us but I believe that we will do it.”

On a more personal note, how does he see the future of his company over the next three years? Again, with optimism and for good reason: “This year people understand the situation here. Things are stabilizing and I hope that the current situation won’t take us two steps back. We shall be promoting Cyprus as a place with a very well-educated and well-trained workforce and proposing the country as an attractive alternative to companies looking to establish a presence in Europe and manage their European operations from here. We’ve been doing well and being a small firm means that we can adapt to circumstances much more easily than a large corporation can and we can be flexible. The well-known quotation [often wrongly attributed to Darwin] that “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change” is a pretty accurate description of what a company like ours can do. So we need to take advantage of the situation, get better and grow. A crisis always brings about opportunities so it’s matter of looking to resolve it and, at the same time, gain some benefit from it. In brief, I would say ‘So far, so good’.

NICOSIA, Cyprus — When the Cypriot government forced bank depositors — many of them Russian — to pay their share of an international bailout last spring, Vasilis Zertalis’s phone started ringing.

The companies his consultancy helps incorporate on this breezy Mediterranean island — many of them Russian, too — wanted to know how quickly they should get out.

These days, the calls are coming for another reason: Businesses are eager to get in.

“We are registering twice as many companies than when after the crisis hit,” Mr. Zertalis, the head of a big registrar, Prospectacy Limited, said as the sun set over palm trees near his office one recent weekday. “Russians, Germans, Latin Americans, Canadians — they’re all coming,” he said.

Especially the Russians. And that is even though they were the category of foreign investors that the Cypriot government and its international bailout creditors seemed to single out for punishment last spring, when officials tried to turn the economy here into something more than an offshore tax haven whose banks looked the other way as money of questionable provenance rolled in from abroad.

The banking system has been drastically overhauled. But the tax haven part less so.

“People are still interested because the legal and tax system remains much more stable than in Russia, and they think that the threat of another haircut is remote,” said Costas Erotocritou, the vice president of the Russian Business Association here, and a lawyer whose firm specializes in setting up offshore accounts.

The haircut he referred to was the Cypriot government’s move last spring to seize vast sums, much of it deposits from wealthy Russians, at the nation’s biggest banks. (Because part of the money seized was converted into bank shares, one other anomaly of the bailout was that it turned wealthy Russians into some of the biggest shareholders in Cypriot banks.)

A year after the bailout, Cyprus’s economy is still in deep trouble and its banking sector is half its former size. With bank tellers, construction workers and retail employees caught in the fallout, unemployment has jumped to 17.5 percent from 14 percent a year earlier; youth unemployment is above 40 percent.

Banks sharply curbed lending as the level of deposits shrank, and nearly half their outstanding loans are in arrears or default. Private debt has surged to around 300 percent of Cyprus’s 17 billion euro economy.

But the one rebounding business is foreign incorporation. Cyprus is once again a favorite tax haven, even after international bailout officials forced the government to nudge the corporate tax rate up to 12.5 percent, from 10 percent. That is still the lowest in the euro zone, on par with Ireland and well below Germany’s 29.5 percent and France’s 33.3 percent.

The registration of what are mostly shell companies created to shelter income was 1,454 in January alone. That is more than double the nadir of last spring, after the bailout, and even slightly more than were registered in December 2012, before the collapse.

As a result, there are now about 273,000 companies on Cyprus’s corporate registry, a staggering figure in a country whose population is only 839,000. “This is not an industry that has died,” said Yiorgos Lakkotrypis, Cyprus’s commerce and energy minister.

And the Russians have dug in.

“The Russians won’t leave because they really don’t have any other option,” Mr. Zertalis said. “Sure they lost money in the haircut, but when it comes to business they will continue to use the island because returning to Russia is not a better solution for them.”

But there is one place where neither the Russians nor any other foreign investors are putting much money: Cypriot banks.

After deposits were seized, “companies generally won’t hold more than 100,000 euros in a Cypriot bank now,” said Mr. Erotocritou.

He was referring to the radical move by officials who, for the first time in a euro zone bailout, forced some depositors to take a loss. The authorities last spring liquidated Laiki Bank, Cyprus’s second-biggest financial institution, and folded its remains into the largest one, Bank of Cyprus, where the government then confiscated 60 percent of deposits above €100,000 to recapitalize the lender.

Total deposits in Cypriot banks, which were €57 billion last April, dropped to €47 billion by November. They might have fallen further and faster if the government had not tightly controlled withdrawals and foreign transfers at the height of the crisis.

By now those controls have been relaxed to the extent that they hardly affect business operations anymore, enabling companies that are still comfortable keeping their money in a Cypriot bank account to conduct transactions more easily than they did six months ago.

Some controls remain in place for individual accounts, including a €300 daily withdrawal limit and central bank vetting of large cash transfers. But last week the finance ministry said further loosening of the rules was in the offing. That was in response to a review by the International Monetary Fund, which found that Cyprus was fulfilling the fiscal promises it made as part of the bailout.

Even so, many businesses are taking no chances. They are setting up bank accounts entirely outside of the euro zone on the concern that, as in Cyprus, their assets could be seized to pay for banking crises that might blow open in other European countries, Mr. Zertalis, the consultant, said.

“No matter what European leaders say now, all of our clients are saying, ‘Let’s split our accounts among as many different countries and banks as we can,’ ” Mr. Zertalis said. “They say ‘We won’t keep our money in Cyprus, but we don’t feel secure about Europe anymore, either.’ ” He said many had turned to financial institutions in Canada, Switzerland and Asian countries.

Yet while financial agents like Mr. Zertalis are enjoying a bounce-back — he doubled the size of his small staff in the last six months and plans to double it again this year — many other people across the island are casualties of the banking collapse.

Thousands of small and midsize businesses have been hobbled by the dearth of bank lending, said George Pamboridis, a senior partner at the law firm Pamboridis.

On Nicosia’s main shopping street, storefronts once adorned with mannequins, shoes and electronics now sit empty. In Nicosia’s main square, retail space formerly occupied by a Laiki Bank branch is vacant, with debris strewn where teller windows once stood.

Outside Nicosia, at a hulking warehouse near green meadows and olive trees, volunteers at the Alkyonides charity rushed on a recent weekday to prepare for the 50 families who had trekked there to receive handouts of food, diapers and used clothing.

Two years ago, the charity typically served around 15 families a month. Today, it is overwhelmed with as many as 1,000 families in need, mostly people who used to work in banking, construction, or retailing, said Koulla Demetriou, a volunteer.

“Many people can’t find jobs, and every month it gets worse,” Ms. Demetriou said, as she typed up a food ticket for Angeliki, 42, a mother of three who recently lost her job working in security for a bank.

“The main hope now is that the people of Cyprus will care for each other.”

In the meantime, the gap between Cypriots out of luck and foreigners with money — especially the Russians — has never been starker.

“Rich Russians love this country,” Mr. Erotocritou said. “They will keep coming back.”

LIMASSOL, Cyprus — Bloodied by a harsh bailout deal that drives a stake through the heart of this Mediterranean country’s oversize financial industry, Cyprus now faces a further blow to its role as an offshore tax haven: the vultures from competing territories are circling.

With a flood of e-mails and phone calls in recent days to lawyers and accountants here who make a living from helping wealthy Russians and others avoid taxes, competitors in alternative financial centers across Europe and beyond are promoting their own skills at keeping money hidden and safe.

“We are aware of the economic problems facing Cyprus at the moment,” read one such message from a law firm in Malta, also a euro zone member. “We would like to propose an avenue of action for your consideration: offering corporate relocation to Malta,” continued the business pitch, trumpeting Malta’s low taxes and “flexible yet robust regime” for financial services.

Similar unsolicited offers have originated in well-known havens like Switzerland, Luxembourg and the Cayman Islands, as well as in a host of other locations, including Dubai and Singapore. Even the northern part of Cyprus, controlled by Turkish Cypriots, has joined the feeding frenzy, promoting its own banks as a stable alternative to those run by Greek Cypriots in the crisis-racked southern part of the divided island.

Particularly successful at luring Russians, Cyprus has built up a large infrastructure of lawyers, accountants and other professionals schooled in the arts of tax avoidance. Its corporate registry now has 320,000 registered companies, a staggering number for a country with only 860,000 people. Most are shells set up for foreign companies and wealthy individuals seeking to avoid taxes.

“We have been thrown to the wolves, and now the wolves have responded,” said Nicholas Papadopoulos, head of the financial and budgetary affairs committee in Parliament.

Bitterly critical of last week’s bailout deal — which is forcing Cyprus to shrink its banking and financial industry drastically and stick the largest bank depositors with much of the bill — Mr. Papadopoulos said the European Union was “punishing a whole country just to hit Russians.”

Even if new controls in Cyprus make it impossible to move much capital elsewhere for the moment, rival havens are nonetheless intent on luring foreign-owned businesses that have been incorporated in Cyprus and might be happy to relocate.

Mounting a counteroffensive is the Cyprus Fiduciary Association, an industry lobbying group.

“The banking sector is finished, but the service industry can survive,” said the group’s secretary, Andreas Marangos, a Limassol lawyer. Russians who now use Cyprus will open bank accounts elsewhere but might stick around for other offshore services, he said.

The rush by rival havens could pose economic troubles as Cyprus struggles to keep afloat a financial industry that employs tens of thousands of people. Cypriot unemployment, already at 15 percent, is expected to soar as the finance sector and the overall economy contract, aggravating a crisis that the bailout was intended to solve. Along with shipping, the financial industry is especially crucial here in Limassol, a port city popular with wealthy Russians looking for sun and a safe place to put their money.

Cyprus, although only a relatively small player in a global network of low-tax financial centers, has made serving tax-averse foreigners a central pillar of its economy. A small sunny island whose main economic engine used to be potato farming, Cyprus shifted to a finance-centered model after Turkish troops took control of the northern part of the island in 1974.

While Cyprus and its rivals dislike being described as “tax havens” and prefer to be known as “offshore financial centers,” those now picking at Cyprus’ carcass trumpet their ability to keep money beyond the reach of tax authorities. A Swiss company, the Gonthier Group, last week sent e-mails to Cyprus firms working with foreigners, suggesting they offer their clients a Swiss alternative, namely an investment “vehicle which is extremely low-profile, not classified as a bank account or trust and thus very much under the radar of national fiscal authorities.”

Tilly Schneeberger Gonthier, a principal of the Montreux-based company, said on Sunday by telephone that her pitch was “absolutely not” an invitation to evade taxes, but merely an offer of a secure alternative to Cyprus-based investment vehicles. She denied wanting to hurt the Cypriot financial services industry.

“We are trying to help them,” Ms. Gonthier said. “They have a lot of unhappy clients.”

She said that nobody in Cyprus had yet taken up her offer, but added: “This doesn’t happen very fast. It takes time.”

Mr. Papadopoulos, the parliamentary finance committee head, said he did not begrudge competitors in other locations trying to lure away clients rattled by his own country’s troubles. “This is a zero-sum game,” he said.

Echoing a widespread view here, he complained that Cyprus had been unfairly singled out as a haven for shady money by the European Union even as others, including fellow members of the 27-nation bloc, provide much the same services.

“We have made mistakes, but the whole point of seeking help from the European Union was to get fair treatment,” he said, referring to Cyprus’s request for a 10 billion euro lifeline from its European partners and the International Monetary Fund.

A central demand of a bailout package announced early last Monday in Brussels, the headquarters of the union’s bureaucratic apparatus, is that Cyprus dismantle its finance-dominated economic model.

Cypriot banks gorged for years on deposits from overseas, especially Russia, and spewed out loans at such a rate that the banking sector ended up dwarfing the rest of the economy. Its total assets — now mostly loans of uncertain worth — grew to be eight times larger than the whole country’s economic output.

But this imbalance is no worse than that in Malta, where the banking sector is also about eight times gross domestic product. And it is far less severe than in Luxembourg, where banking assets are more than 22 times G.D.P. Both Malta and Luxembourg, each a member of the European Union, last week loudly insisted they were very different from Cyprus — while their own financial service providers rushed to court Cyprus’s clients.

How much success those countries have had at getting Russians and others to decamp is still unclear, although many lawyers here acknowledge that they have already helped a number of foreign clients open new bank accounts outside Cyprus. The country’s own banks, closed for nearly two weeks to prevent depositors from withdrawing all their cash, reopened last week but are now caught up in a web of capital controls that make most normal transactions all but impossible.

Vasilis Zertalis, the chief executive of Prospectacy, a Nicosia corporate services company, said he understood that foreigners with companies and investment vehicles registered in Cyprus now needed to find banks elsewhere. But he is outraged by the efforts of rival centers to profit from Cyprus’s pain.

“When somebody is down, you should not try to push them further and give them a final blow,” said Mr. Zertalis. “I believe in capitalism, but there should be certain ethics.”

As authorities last week unveiled plans to shut down Cyprus’s second biggest bank, Laiki, and worked out a strategy to preserve the Bank of Cyprus, the country’s biggest, by effectively confiscating 60 percent or more of deposits over 100,000 euros, a financial services company in the Cayman Islands made a transparent grab for business.

“Given the inherent pressure banks will be placed under in Cyprus, your firm may see a need to consider other jurisdictions when consulting clients,” Bateman Financial said in an e-mail to Mr. Zertalis and other Cypriots in the same line of work. “The Cayman Islands can offer the stability that is currently desired.”