Update - Further to our briefing below kindly note that the draft bill for haircut on deposits was rejected by the House of Representatives. Harneys is monitoring the developments.
On 15 March 2013 the representatives of the Republic of Cyprus met with other members of the Eurogroup, the informal body comprising the finance ministers of the 17 member states of the eurozone, to reach an initial agreement for the sovereign bail out of Cyprus. The preliminary compromise, pending approval by Parliament in Cyprus, includes the following terms:
Up to €10 billion in lending support from the European Central Bank and the International Monetary Fund.
The introduction of a one-off levy (a “Stability Levy”) on all deposits maintained in accounts with Cyprus-based banks, co-operatives and branches of foreign banks licensed to carry out banking activities in Cyprus. The rate of the Stability Levy initially agreed would impose a charge of 6.75% on deposits of up to €100,000 and 9.9% on deposits in excess of €100,000. It appears that deposits of up to Euro 20,000 will remain unaffected. The draft bill would impact deposits in all types of accounts, including current accounts, savings accounts and fixed income accounts, however it is important to note that changes are being suggested to exempt client accounts from the measure. It is presently unclear whether non-cash custody accounts will be impacted by the measure.
In return for the charge under the Stability Levy it is planned that account holders will receive either shares in Cypriot financial institutions, government-issued bonds or other similar instruments although, again, it is unclear how this will be implemented. In certain instances such instruments will be guaranteed by future earnings from the nascent Cypriot energy sector.
The rate of corporate tax to be increased by 2.5 percent, from 10 percent to 12.5 percent.
The rate of the Special Defence Contribution on interest to be increased by up to 10 percent, from 15 percent to a sliding scale up to 25 percent.
The proposed measures do not affect regimes governing dividends, capital gains on securities, immovable property or interest earned by non-residents.
The proposed Stability Levy has caused major reaction and controversy both within Cyprus and internationally. Information emanating from news sources following the Eurogroup meeting suggests that amendments will be made to the proposed measure to offset some of its harsher effects. The Cyprus House of Representatives was initially due to vote on the initial compromise in an extraordinary session of House scheduled for 17 March, however the vote has been postponed pending further governmental and intergovernmental discussion. Timing for the vote remains unclear. In the meantime the government has ordered all banking institutions in Cyprus to remain closed until 21 March.
For more information on this subject please contact Pavlos Aristodemou (email@example.com).
The Special Defence Contribution is a levy imposed on specified forms of income from sources in Cyprus and which may be payable by individuals and companies resident in Cyprus for tax purposes.