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’.