Gold Magazine April - May 2013, Issue 25 | Page 28

COVER STORY

YES
XXX
WE
CAN

Tough Measures

By Andreas
Christofides

Will Bring
Stability

FOR INVESTORS, CYPRUS STILL HAS ONE OF THE
MOST FRIENDLY TAX SYSTEMS IN EUROPE

C

yprus is facing its
largest financial crisis
since the Turkish
invasion in 1974.
Indeed, some analysts claim that the
situation now is even
worse. A series of decisions at the European
level, together with structural problems in
the Cyprus economy, led the country to ask
for financial assistance from the European
Commission, the European Central Bank
and the International Monetary Fund (“The
Troika”) in June 2012.
The negotiations resulted in the Eurogroup’s decision on 25 March to resolve
Laiki Bank and restructure Bank of Cyprus,
which will be recapitalized through a deposit/equity conversion of uninsured deposits.
I appreciate the fact that depositors in
the two banks will be seriously affected and
that this will undermine the confidence of
investors in the Cyprus banking system.
However, I believe that through hard work
we will manage to stabilize the business environment and bring the economy back to
growth.
The agreement on a financial support
package, although onerous in some of its
terms, will bring back stability to the market
and eliminate uncertainty. The European
Central Bank’s decision to allow the use of
the Emergency Liquidity Assistance mechanism will provide sufficient liquidity to the
financial system, so as to absorb possible
reactions by depositors.
The financial services sector corresponds
to 40% of the country’s Gross Domestic
Product, contributing €8 billion to the
national budget. Any shrinkage of the sector
will undermine the country’s ability to repay
its debt, something which raises questions
about the Eurogroup’s intentions when tak-

The increase in th
corporate tax rate e
is
manageable and
expected to negais not
tive
affect internation ly
business in Cypr al
us 

ing its decision on a deposits haircut.
The decision also provides for a 2.5%
increase in the corporate tax rate to
12.5% and a flat solidarity fee of 10%
for three years in relation to bank interest income. The increase in the corporate tax rate is manageable and is not
expected to negatively affect international business in Cyprus in any significant way. Cyprus will still have one of
the most friendly tax systems in Europe
with no taxation imposed on the sale
of shares, full participation exemption on
dividend income, no withholding tax on
dividends, interest and royalties, no thin cap
rules, no exit charges, effective tax on royalty
income of 2.5%, interest income taxed being taxed only on a thin margin only and so
many other benefits.
The process of resolution of the two largest financial institutions in the country will
surely cause a lack of liquidity in the market,
driving Cyprus into a long depression period. The European Commission predicts
that the economy will shrink by 15% this
year. It is therefore necessary to take measures that will confine the negative effects of
the bailout agreement.
We need to provide tax and other incentives for repatriating funds that will be invested in the real economy and for attracting
foreign investments, especially businesses
undertaking Research & Development. It
is essential to reduce bureaucracy and create
fast-track procedures for new investments,
and automating IT systems need to be put
in place in government departments, especially the office of the Registrar of Companies and the Inland Revenue.
The coming months will be extremely
difficult since the decisions relating to the
two major banks will affect both Cypriot
businesses and the confidence of foreign in-

vestors. However, the other financial institutions have not been materially affected and,
hopefully, no sig