Before relying on anything in this Blog, please read the disclaimer
50% of all Cypriot business loans are non-performing (delayed greater than 90 days) in accordance with the KPMG report. Cypriot SMEs are severely restricted from receiving bank financing. Perhaps Cypriot SMEs can be prompted to consider alternative financing arrangements (such as corporate bonds ) other than typical banking loans to facilitate their credit needs and expansion programs. Large depositors have been hit with a negative interest rate of 0.5% in the first week of August 2019. At a time when large depositors are looking for practical solutions to apply their funds and Cypriot SMEs looking for financing perhaps alternative financing is the bridge to ensure both interests are satisfied.
Alternative financing can be in the form of crowdfunding, grants, private equity, restricted issue of shares and corporate bonds.
” Small and medium-sized enterprises (SMEs) are rightly considered as the heart of the Cypriot economy. The statistics are irrefutable: a contribution of 55% to the added value of the local economy and 62% to the total employment of the local economy “
KPMG Cyprus Credit Institute, Credit Insights, 3rd edition, July 2019
Cyprus Alternative Finance
Alternative Finance refers to financial channels, processes, and instruments outside the traditional finance system such as banks and capital markets. This category of financing is growing along with technology. For example, cryptocurrencies were not available 10 years whereas now they are dominating the finance world along with possible cryptocurrency markets and e-wallets.
This article will consider the EU Prospectus Directive and Cyprus Prospectus Law, the legal aspects of issuing corporate bonds from a private company and finally the recent tax amendments to the special defense contribution law (SDC).
Legal Aspects of Issuing Corporate Bonds in Cyprus
A bond is essentially an IOU; it is a promise by a borrower (called an issuer) to repay (or pay) money to an investor (called a bondholder), usually with interest. Issuing bonds is a way of raising finance. The issuer borrows money by selling bonds to bondholders; the issuer receives the money and the bondholder receives a promise from the issuer to repay the debt at a later date, usually with interest.
The bond issuance takes the form of a registered bond, title passes by registration of the bondholder’s name in a register of bondholders.
Registered bonds are represented either by electronic certificates or physical certificates given to an investor. These certificates are simply the evidence of title. Handing over the certificate to another person does not pass ownership to that person. Title can only pass by registering the name of the new owner in the register.
The legal requirements of bond issuance in Cyprus will depend on the total value of the bonds, the people to which they are addressed, the platform used to publish the bond issuance as well as the countries in which such bonds are intended to be issued.
EU Prospectus Directive and Cyprus Prospectus Law
The Prospectus Directive (EU) 2017/1129 has been transposed to Cypriot legislation as an amendment to Law 114(I)/2005. To a large extent, the prospectus directive and the Cyprus Prospectus Law are aligned. Certain extracts from the directive are explanatory:
Where an offer of securities is addressed exclusively to a restricted circle of investors who are not qualified investors, drawing up a prospectus represents a disproportionate burden in view of the small number of persons targeted by the offer, thus no prospectus should be required.
Paragraph 15 of the Prospectus Directive
The application to any offer of securities to the public with a total consideration of less than EUR 1.000.000 is excluded from the EU Prospectus Directive’s scope. In opposition to the Cyprus Prospectus Law, the same threshold is set to EUR 5.000.000. Nevertheless, both conclude that the maximum number of retail members should be restricted to 150 natural and legal persons ( Section 4(3)(a) Cyprus Prospectus Law)
Cyprus Prospectus Law applies to issuers greater than Eur 5.000.000
Section 4(3)(e) Cyprus Prospectus LAw
Companies Law, Chapter 113
Section 29(1) of the Companies Law restricts private companies from publicly offering to the world at large shares and corporate bonds. Furthermore, Section 83 of the Law provides that every company shall keep at its registered office a register of bondholder of the company.
Sections 38 – 46, of the Companies Law relates to the Prospectus, its contents and registration process. Section 46A excludes compliance with the provisions of section 38 – 46 of the Companies Law when “the securities or bonds are subject to the provisions of the Prospectus Law and irrespective of whether a Prospectus is needed or it is not.
Section 46A was inserted to the Companies Law with amending law 89(i) 2015. The only cases I have identified restricting the offering of bonds to the public are the following:
- DIMCO ELECTRICAL SUPPLIERS LTD V. Police (2006) 2 A.A.Δ 453
- Α. Ζορπας & Υιοι ΛΤΔ V. Police (2006) 2 A.A.Δ 463
Both cases relate to the golden era of the formation of Cyprus Stock Market, and the offer of shares to more than 500 investors in Cyprus. Both cases were appealed and won due to a misconception of the court.
Assuming thought an offer to the world is within the the Cyprus Prospectus Law the provisions of Section 46A should exempt the obligation for a prospectus. A thorough investigation has been conducted as to the possibility of finding a case relevant to Section 46A of the Companies Law, Chapter 113 however this has not been identified to date.
Memorandum and Articles of Association
The Company’s memorandum of association contains an express power to borrow funds. In the absence of any restrictions on the directors to borrow and raise funds, they may proceed and issue corporate bonds.
Cyprus Tax aspects of bonds
For the issuing company, the entire amount will be a liability on the Company’s balance sheet and as such a deductible expense. If the bonds are issued at a discount then the discount will amortize over the lifetime of the bond.
An amendment to the Special Defence Contribution (SDC) Law was published in the Official Government Gazette on the 26th of June 2019. The reduced rate of taxation on corporate bonds can incentivize investors to consider lending funds in the form of a corporate bond. Since until recently, the SDC on Bonds was set at 30%. For non-Cypriot domiciled individuals, the tax basis is nil.
Could a reduced rate of taxation (30% to 3%) incentivize a waive of corporate bond issuance?

Foss v Harbottle Rule in Cyprus
Learn about the rule in Foss v Harbottle and its exceptions in Cyprus, including the ultra vires rule and the fraud on the minority rule.