Q&A on Cyprus' new banking laws

28 March 2013 - Below are answers to frequently asked questions about banking in Cyprus in the context of the current banking crisis.

Q.    Under what circumstances is the Deposit Protection Scheme activated?

A.    The Deposit Protection Scheme (DPS) is activated, inter alia, where:

(i)    The Central Bank of Cyprus (CBC) concludes that a particular member-bank is unable to repay its deposits for reasons relating to its financial position and it is foreseen that the bank will not be able to do so in the near future, or
(ii)    An order has been issued by a Court of the Republic of Cyprus for the liquidation of the particular bank, pursuant to the Companies Law

Q.    What is the maximum amount of coverage for each depositor?

A.    The maximum amount payable as compensation to a depositor, for the aggregate of his deposits with a particular bank, is €100.000 including accrued interest up to the date of maturity of the deposit or the date on which the deposit fell due and payable but was not repaid, or the date on which the member bank was determined as unable to repay its depositors (whichever comes first).

Q.    Are deposits held in the name of a particular person with different banks considered to be separate deposits for the purpose of calculating the compensation payable from the Deposit Protection Fund?

A.    Deposits in the name of a particular person, held with different banks, are considered to be separate deposits for compensation purposes.

Q.    What haircut is applicable to bank deposits held with credit institutions other than the Bank of Cyprus?

A.    In accordance with the final understanding made between the government of Cyprus and Eurogroup, no haircut is applicable to bank deposits held with banks or credit institutions other than the Bank of Cyprus.

Q.    Which deposits are covered by the Deposit Protection Fund?

A.    Deposits covered include all deposits held bynatural or legal persons with banks incorporated in the Republic of Cyprus, or with their branches operating in other countries, and all deposits with branches of banks incorporated outside the European Union. The categories of deposits which are excluded from coverage are the following:

(a)    Deposits by other banks held for own account and deposits of cooperative institutions whose main purpose is the carrying out of banking business.

(b)    Deposits of banks incorporated in other countries which are licensed to conduct banking business under the relevant legislation of a country otherthan the Republic of Cyprus.

(c)    Deposits by persons against which criminal proceedings have been instigated or for which a confiscation order has been made, under the Prevention and Suppression of Money Laundering Activities Law or a corresponding law of another country.

(d)    Deposits by government departments, semi-governmentorganizations and local authorities.

(e)    Deposits by provident and pension funds.

(f)    Deposits by insurance companies either in their own name or in the name of trustees.

(g)    Deposits by collective investment companies.

Q.    Have any changes to the Cyprus tax system been made?

A.    No law has been passed as yet in relation to our tax system.

Q.    Does the lack of a bank account in Cyprus mean that a company incorporated in Cyprus is not resident in Cyprus for tax purposes?

A.    No, the test for tax residency is the management and control test and it is not mandatory for such purposes that the Cyprus company maintain a bank account in Cyprus.  

Q.    Does Cyprus have adequate law to facilitate the transfer out of companies to another jurisdiction?

A.    Yes, a Cyprus company may, if the laws of a country or jurisdiction so permit, and upon having obtained the prior consent of the Registrar in Cyprus, submit an application to the competent authority of that country or jurisdiction in which it chooses to register for the purpose of continuing under the legal regime of the said country or jurisdiction.

Q.    In the case of the Laiki Bank and the Bank of Cyprus how quickly will the DPS be applied?

A.    Reimbursement should take place within 20 days, in line with the EU Directive 94/19/ EC.  

Q.    Are correspondent accounts at Laiki Bank affected?

A.    Yes, all accounts are affected by the Resolution of the Laiki Bank

Q.    Did the government have the legal right to close the banks and other credit institutions on days which they are normally open for business?

A.    Yes, in accordance with section 69 of the Central Bank of Cyprus Laws, notwithstanding anything contained in the Bank Holiday Law in force for the time being, the Minister may, if he deems it that such action is in the public interest, declare by a notice published in the Official Gazette of the Republic that certain days shall be observed as special bank holidays or as days during which no transactions between the banks and the public shall take place.

Q.    How is the amount of compensation payable to depositors determined?

A.    The amount of any liability of a depositor to the bank in respect of credit facilities granted by the bank and any other counterclaim of the bank in respect of which a right to set off exists shall be deducted from the total amount of the liability of a bank to any depositor.

Q.    Are deposits held in currencies other than the euro covered?

A.    The DGS covers deposits in all currencies. In the case of deposits denominated in a currency other than Euro, for the purposes of calculating the amount of compensation, the foreign exchange reference rate of the relevant currency against euro as specified by the European Central Bank at the close of business of the date on which the deposits were rendered unavailable shall be used.

Q.    Where a person maintains joint accounts with other persons and, also, accounts with debit balances, how is the amount of compensation determined?

A.    In the case where two or more persons are jointly entitled to a deposit, for the purposes of compensation, each of them shall be treated as having a separate deposit of an amount calculated by dividing the credit amount in the account to which they are jointly entitled by the number of persons so entitled, unless specific evidence or special contractual terms determining the particular amount belonging to each of the beneficiaries of the joint account so exist. In the case of a deposit to which two or more persons are entitled as members of a partnership, or a deposit which belongs to an association or any union of persons with or without legal personality, the deposit shall be treated as a single deposit for the purposes of calculating the amount of compensation.

Q.    Are deposits held by an individual considered to be separate from deposits held in the name of a legal person i.e. a person established as a separate legal entity, in which that particular individual has an interest as holder of share capital?

A.    Companies are separate legal entities, independent of the shareholders. Legal entities and shareholders are entitled to separate compensation provided they do not fall within the categories of deposits excluded from compensation.

Q.  What legal avenues are available for consideration?
A.  An affected party may consider protecting its legal rights. Cyprus is a signatory to the most important multilateral treaties relating to foreign investment; (i) the Energy Charter Treaty, the provision of which protect investors and their investments from political risks involved in investing into a foreign country such as expropriation etc; (ii) the Multilateral Investment Guarantee Agency, which offers insurance to cover risk such as transfer restriction; government expropriation; and civil disturbance; and (iii) the International Centre for Settlement of Investment Disputes a forum providing facilities for the resolution of disputes between eligible parties through conciliation or arbitration. Cyprus is also a party to numerous bilateral investment treaties governing issues relating to investments carried out by nationals of one contracting state in another with countries such as Armenia, Belarus, Belgium, Luxemburg, Bulgaria, China, Czech Republic, Egypt, Greece, Hungary, India, Lebanon, Malta, Poland, Romania, Seychelles and Serbia.

Q.    Are corporate structures affected by the current situation in Cyprus?

A.    Corporate structures are not affected by the banking crisis. Holding structures in particular which are the most popular type of Cyprus structures remain unaffected as tax on dividends and treaty extraction and withholding taxes remain unchanged. Cyprus companies may operate bank accounts out of Cyprus without implication on their tax resident status in Cyprus.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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