Financial Stability Program for Cyprus - Important Update
Contributed by Fiducenter (Cyprus) Ltd
02 April, 2013
Contributed by Fiducenter (Cyprus) Ltd [www.fiducenter.com.cy]
Banks re-open in Cyprus
After almost two weeks of being closed following a direction by the Central Bank of Cyprus, the banks and other institutions in Cyprus opened again yesterday. The fear for a bank run (i.e. everybody rushing to take their money out) but also the concern for hostile behaviour by the public has proven false as the people of Cyprus have shown exemplary patience and understanding. Indeed this was commented heavily by everybody and especially by foreign media which were expecting to shoot panic scenes outside bank branches. It is worth mentioning that some people were even depositing money in Bank of Cyprus in order to show that they still have faith in the banking system!
Council of Ministers decisions related to the Financial Stability Programme
During a meeting on 28/3/2013, the Council of Ministers, headed by the President of the Republic, has taken some very important decisions related to the financial crisis in Cyprus. The most radical decisions taken are considered to be the following:
- reduction in the salary of the President by 25% and that of the Ministers by 20%
- transfer of the deposits of those provident and pension funds, which had accounts with Laiki Bank to Bank of Cyprus through their inclusion in the good part of Laiki. Furthermore any loss to be suffered from the haircut to be applied to deposits in Bank of Cyprus to both the provident and pension funds transferred from Laiki and those of Bank of Cyprus will be partly compensated by the government, most probably through the EUR10bn. aid to be received from the Troika
- creation of an Inquiry Committee, consisting of three retired judges of the Supreme Court, for examining, in summary, what went wrong and come up with a list of those who bear the blame within three months
Impact of the banking crisis on the international business sector
With regards to the international business sector, the impact is not expected to be significant, as Cyprus is used mostly as a business/tax planning jurisdiction and not as an investment location where foreign investors "park" their funds as part of asset management strategies. In order to put things in to perspective, our Administration Department has prepared some statistics, which support the above mentioned argument.
- 25% of companies managed have a bank account in Cyprus
- 10% of those, or only 2.5% of the total number of companies managed, have an amount exceeding EUR100,000 in their bank accounts in Cyprus
Our Managing Director, Mr. George Savvides, in his capacity as President of the Cyprus Fiduciary Association, has been asked by the press over the last few days, about his position on some critical issues concerning the international business sector in Cyprus. We included below, three of these queries.
1. Changes in tax regime
The only planned increases which have been announced so far is the increase of the Corporation Tax rate to 12.5% and the increase of the Special Contribution for Defense (for Cyprus tax residents) on passive income, with the rate not being set yet, although some figures have come to light. Both of these measures are included in the Eurogroup statement issued upon conclusion of the negotiations in the early hours of the 25th of March. Earlier today in reply to a relevant enquiry raised by the Institute of Certified Public Accountants of Cyprus, the Minister of Finance has actually confirmed that these are the only changes agreed.
We have over the last few days come across so much mud-throwing against Cyprus that it is inevitable that rumours will develop about everything.
With regards to the specific speculation about abolishment of the exemption from Withholding Tax on payments of dividends out of Cyprus, it could be that a lot of people are just getting confused by the Eurogroup statement (attached). The sixth paragraph on the first page reads: The Eurogroup further welcomes the Cypriot authorities commitment to take further measures. These measures include the increase of the withholding tax on capital income and of the statutory corporate income tax rate. The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.
I presume that by Withholding Tax on capital income they mean the Special Contribution for Defense on interest but for somebody who is not really familiar with the SCD this might be interpreted otherwise.
2. Do you think the change in the Corporation Tax rate will cause a damage?
The planned increase in the Corporation Tax rate is not expected to affect significantly in the international business sector, especially based on the current model of Cyprus. This has been grounded with some statistics the Accounting and Tax Department of Fiducenter has prepared for the companies under its management. It might cause an impairment in the prospects with regards to attracting commercial companies, especially considering that Cyprus was trying to establish itself as the gateway to Europe for Asian and Middle East countries and the other way round but the government is considering to introduce some tax incentives for commercial companies both of local and international interests, similar to the accelerated depreciation allowance which was voted for certain types of assets some time ago. Besides, at 12.5% the Corporation Tax rate of Cyprus is still one of the lowest in the EU.
The planned increase will actually have a positive aspect as the 10% rate was creating trouble to Cyprus for what concerns business dealings with countries which have a provision in their tax law for considering as tax heavens countries which have a Corporation Tax rate of less than half of their own. An example is Greece, for which it was very difficult to get a tax exemption even for invoices issued by a Cypriot entity to a Greek person for purely operational reasons and a tax residency certificate was needed to support every single charge.
3. What are the prospects for Cyprus both as an international centre and as an economy overall?
For what concerns the international business sector it is of paramount importance to highlight the fact that no damaging changes have been introduced to the advantageous tax regime of Cyprus, which continues to provide, amongst other, for:
- Full exemption on dividends
- Exemption on the disposal of shares and other securities as well as immovable property situated outside of Cyprus
- 80% exemption on profits from the exploitation of intellectual property rights, under the recently implemented new IP regime
- Unrestricted access to all EU Directives (Parent-Subsidiary Directive, Interest and Royalty Directive, etc.)
- Zero withholding taxes on payments to non-residents
- No thin capitalisation rules
- Tonnage tax for the shipping industry
In addition, there is no intention for introduction of a financial transactions tax in Cyprus.
In combination with its modern and flexible legal regime, the well-educated human capital, the first grade infrastructure, its strategic geographical position and a plethora of other advantages, Cyprus continues to be an attractive location for international business and tax planning.
Over the past few days, based not only on our own experience, but also on feedback we receive from peers, it is evident that foreign investors based in Cyprus, or who are using Cyprus in their international structures, do not consider the domestic banking crisis as an impediment to their plans. The Cyprus banking system and its corporate structures are distinctly separate. The recent uncertainty surrounding the banking sector has not affected the demand for quality legal and professional services from local providers with structuring projects and direct investments involving Cyprus companies.
With regards to the economy as a whole, for sure things will be difficult over the next few years but the long term prospects, arising mainly from the exploitation of the significant natural gas and possibly oil reserves that are believed to exist in the Exclusive Economic Zone of Cyprus, have not been damaged by the latest developments. In a few months time the conformational drilling will be performed in the first offshore field licensed for exploitation and this might open the way for significant inflows to the state coffers through pre-sale agreements. At the same time huge efforts need to be taken to re-ignite the economy, through incentives, subsidies and other initiatives, which will lead to increased production and reduction of unemployment. Lastly, effective reform of the public sector is needed, in order to cut bureaucracy, increase productivity and make the best use of public resources.
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