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Financial Stability Programme for Cyprus - The Day After

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Contributed by Fiducenter (Cyprus) Ltd
28 March, 2013


Contributed by Fiducenter (Cyprus) Ltd [www.fiducenter.com.cy]

Dear All,

Further to the updates we have been providing you about the financial rescue package for Cyprus, now that everything seems to be taking effect, we would like to come back, not to provide you with more facts and figures, but to express our views and opinions about the whole situation and the subsequent consequences of utilising Cyprus in your tax planning operations.

First of all, we would like to express our sincere thanks and gratitude to all clients and contacts for their concern and sympathy about what has been taking place in Cyprus over the last ten days. It is greatly appreciated by all of us here.

We would then like to stress that a financial assistance programme, of whichever form or type, was a necessary and unavoidable evil. This is primarily because some of the banks, and in turn the whole country, considering the size of the banking sector in relation to the small size of the Cyprus economy as a whole) had reached the verge of bankruptcy. We will not consume this communication on why this has happened, or whether it could have been prevented, this must form the goal of a special study to identify the causes and allocate responsibility and blame, where necessary.  

You have already been informed in detail about the downside of this programme from our special newsletters, which can be viewed by clicking here, over the last few days. The positive outcome of the whole process is that the financial assistance programme agreed addresses the exceptional challenges that Cyprus is facing and restores the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years. Specifically, the programme provides for financial assistance to Cyprus of up to €10bln in order to safeguard financial stability in Cyprus and the euro area as a whole. Furthermore, the measures relating to the banking sector affect only the two banks, with the remaining 40 banks (including branches of foreign banks) and other co-operative institutions currently operating in Cyprus, along with their depositors, remaining unaffected.

The banks will open again today after almost two weeks and there will be some restrictions on the banking transactions for a certain period of time, which are expected to be lifted gradually. We have issued a relevant update earlier today.

Coming to the million-dollar question; is there light at the end of the tunnel? Realistically, it will take a long road to reach that end but the general opinion is that the prospects are there, it is just a matter of believing in them and working hard to turn them in to tangible benefits for all.

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

Even the probable increases in Corporation Tax from 10% to 12.5% and Special Contribution for Defense from 15% to up to 25% are not expected to affect international companies to a great extent. Again using Fiducenter statistics computed by our Accounting and Tax Department, based on the 2011 accounts of Cyprus companies managed by Fiducenter, the situation is as follows:

  • 6.93% of companies of companies had a Special Contribution for Defense liability, from passive interest income      
  • 10.82% of companies had a Corporation Tax liability
  • 7.79% of companies had a Corporation Tax liability which arose from active interest income
  • 3.03% of companies had a Corporation Tax liability which arose from commercial income

We should note here that we expect to have news on the issue with the tax increases within the next few days, since all the attention so far was focused on how to get the banking system up and running again.

Following from the above, 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.

We will continue to closely monitor the developments, assess the situation and inform you on the progress. We would like to assure you that as your local professional service providers, business partners and friends, we are doing everything within our reach to support your best interests. As your reliance and trust in us has supported not only our firm and its members but also a respectable part of the financial and economic activity of the country as a whole, we wish to confirm once more that we are closely monitoring the situation, are in continuous communication with decision makers in Cyprus and take part in discussions, consultations and public media presentations on how to handle the situation and on the way forward.

We remain at your entire disposal for any further information or clarification you may require.

Thank you very much.

Kind Regards,

George




 

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