Gold Magazine April - May 2013, Issue 25 | Page 33

Deadlines, Ultimatums,
Agreements and Rebuilding
DESPITE AUSTERITY MEASURES AND HARSH DEMANDS, THE GOVERNMENT
HAS REAFFIRMED ITS COMMITMENT TO THE PROFESSIONAL SERVICES
SECTOR

L

ast month, statements
were repeatedly made by a
select few – albeit influential – political leaders of
our European partners,
claiming that “Cyprus’
economic model has
failed”. Nothing could be further from the
truth. Since the Turkish invasion of1974,
Cyprus has built a very successful financial
services sector which developed around its
attractive taxation system (Double Taxation
Treaties with over 40 countries), the country’s
inclusion on the OECD’s “white list”, a highlyeducated pool of financial and legal professionals, an excellent system of communications
and infrastructure, and also on account of the
island’s convenient location. It has, in fact, been
such a successful economic model that it appears to have caused concern among competing
jurisdictions.
What caused the problem – and this is an
undeniable fact – is that the two largest banks
in Cyprus had incurred huge losses on account
of their exposure to the Greek debt crisis and
subsequent PSI (directed by the European
Commission) and due to non-performing
Greek-held loans. It is also true that Cyprus was
burdened with an excessive public sector. These
factors, coupled with the global financial crisis,
eventually led to a downgrade of the Cyprus
economy and to the country’s request for funding from the European Stability Mechanism
(ESM) last June. The ESM imposed a series of
austerity measures upon the people of Cyprus,
including a reduction to the number of public
sector employees, salary cuts, the abolition of
many other benefits, tax increases, etc, which,
although harsh, were readily adopted.
Then, on March 15, the sudden decision
of the ECB to suspend any further funding
towards Cypriot banks via the Emergency Liquidity Assistance mechanism, left the Cypriot
President with no room for negotiation. In

fallacy of its decision, the Troika then attempted
to make amends and a mea culpa was expressed
by the Eurogroup’s president. The damage to
Cyprus’ reputation, however, had already been
made.
The terms of the eventual agreement were
such that they satisfy the Eurogroup’s aim of
reducing the size of Cyprus banking sector
and they concern the two main banks on the
By Polakis
Sarris
island: Laiki Bank will immediately enter a
process of resolution and Bank of Cyprus will
be restructured.
The agreement, onerous as it is, opens the
way for Cyprus to sign a Memorandum of
Understanding (MoU) with the Troika in order
to bring about the necessary reforms required to
reduce the public debt. The measures to be included in the MoU are, to a large extent, known
and many have already been brought into effect.
Among the proposed measures is an increase in
the rate of corporation tax from 10% to 12.5%
which still leaves Cyprus with a most attractive
regime for holding companies on account of
the tax-free flow of dividends through Cyprus,
short, Cyprus was asked to come up with €6bn no taxation imposed on the sale of shares, no
in cash (33% of its GDP) within five days or
withholding tax on dividends, interest and royalface bankruptcy. No country in the world could ties, no thin cap rules and an IP regime with an
reasonably be expected to comply with such a
effective tax rate of 2.5%. Most importantly,
demand, which leaves many unanswered ques- however, the Cyprus government has reaffirmed
tions.
its commitment towards the financial services
The agreement reached in Brussels on the
sector and internati