Cyprus Authorities Introduce One-Off Bank Deposits Levy

Cyprus Authorities Introduce One-Off Bank Deposits Levy

Last Friday the finance ministers of the EU member countries have made preliminary decision on financial aid for Cyprus in the amount up to EUR 10 bln.

Initially they were discussing the option of providing Cyprus with EUR 17 bln, however, the EU finance ministers resolved that Cyprus should derive the rest EUR 7 bln through introduction of bank deposit levy and other fiscal measures.

The Cyprus Parliament was expected to make the relevant decision on the same day, but the voting was postponed till March 17, then till March 18.

There is a great chance that during today’s session the Cyprus Parliament agrees with the EU’s conditions for getting financial aid. This will mean that the new levy on bank deposits to be charged starting from tomorrow.

Today is a public holiday in Cyprus. This means that the Cyprus banks’ clients cannot withdraw their funds before the levy is introduced, as Cyprus banks do not operate now. Thousands of Cyprian and foreign depositors tried to withdraw their savings through ATM’s, but many of them were out of operation or had limits for withdrawal up to several hundreds euro.

The rate of the one-time levy will be 6.75% for deposits under EUR 100,000 and 9.9% for deposits from EUR 100,000 and more. It is expected that the levy amount will be charged from the depositors’ accounts during few days from the date of levy introduction. According to the unconfirmed report, the Bank of Cyprus has sent instructions to suspend all the banking transactions in Cyprus banks.

Other fiscal measures that will be adopted by Cyprus for getting financial aid from the IMF and the EU are the following:

-          corporate tax rate hike from 10% to 12,5%;

-          introduction of 20-25% tax on bank deposit interest.

The experts reckon that bank deposits levy would have significant effect on Russian capital kept in Cyprus banks. According to the Moody’s, the total sum of the assets owned by Russians and kept in Cyprus banks is about EUR 9,1 bln. Naturally, Russian clients of Cyprus banks demonstrated negative reaction in response to the possible levy. In case of levy introduction, Cyprus banks will definitely face the significant capital withdrawal, and the Cyprus banking will lose investors’ trust for many years.

The Cyprian minister of finance Michael Sarris will visit Moscow on Wednesday to discuss treatment of Russian capital kept in Cyprus. Probably, Cyprus will make an attempt to prevent mass closing of bank accounts and investment withdrawal.

Some experts say that the introduction of the one-time bank deposits levy and the minor corporate tax hike will hardly effect Cyprian fiduciary and corporate industry: the vast majority of Cyprus companies established by foreign investors in Cyprus can use overseas bank accounts, not Cypriot ones.

However, we advise all our clients using Cyprus  companies and/or accounts at Cypriot banks to contact our experts in order to analyze all the risks and elaborate the effective solutions in this complicated situation around Cyprus.

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