Situation in Zypern

Angst ums Geld – Die europäische Gemeinschafts­währung ist angeschlagen. Zur aktuellen Eurokrise, die viele Sparer verunsichert, haben wir nachstehendes Update von Angelos Theodorou, Geschäftsführer von Eurofast / BKR Zypern (http://eurofast.eu/global/) erhalten. BKR International, bei dem wir seit Frühling 2012 Mitglied sind, ist ein globaler Verbund unabhängiger Wirtschaftsprüfer, Steuer- und Unternehmensberater. Aktuell ist BKR International mit mehr als 150 Firmen und 300 Büros in über 70 Ländern weltweit vertreten.

Update as at Friday, 5th of April 2013

Content

• Agreement of TROIKA and the Republic of Cyprus
  1. Announcement of Central Bank of Cyprus in regards to the Bank of Cyprus and Laiki Bank
  2. Temporary restrictive measures on transactions of Cyprus Banks (Latest Update)
  3. The next day
  4. Cyprus Bailout: Legal rights and options

• Changes in Cyprus Tax Legislation
  1. Saving of books and records
  2. Keeping books and records
  3. Provisional tax
  4. Employer’s Return (IR7)
  5. Income tax returns of employees (IR1)
  6. Income tax returns of non tax residents
  7. Increase in the penalty for fraudulent omission or delay in tax payments
  8. Capital Gains Tax
  9. Double tax relief between Cyprus and Germany
  10. Rental income subject to Special Defence Contribution
  11. VAT
  12. Social Insurance
  13. Amendments to IP Rights

Agreement of TROIKA and the Republic of Cyprus

Announcement of Central Bank of Cyprus in regards to the Bank of Cyprus and Laiki Bank

Laiki Bank

• Sale of Laiki’s Business in Cyprus to the Bank of Cyprus.
• Insured deposits, up to €100,000, have been transferred to the Bank of Cyprus
• For deposits of more than €100,000: the amount up to €100,000 will be transferred to the Bank of Cyprus, as part of the “Good Laiki”. The rest of the amount will remain in “Bad Laiki” and approximately 50% of those funds will be used for debts of the Bank. The funds that will remain in “Bad Laiki” could be tied up for up to 3 years.
• Loans and credit facilities are transferred to the Bank of Cyprus, unless they fall in the category as to remain in the “Bad Laiki”. A set off between loans and deposits will take place.
• Shareholders, Bondholders and creditors of Laiki will be transferred to the Bank of Cyprus

Bank of Cyprus

• If aggregated deposits of one customer, held on March 26 2013, is more than €100,000. then that amount shall be treated as follows:
  • Loans and credit facilities are deducted from the deposits exceeding €100,000. For the remaining amount the following shall apply:
    • 37,5% is converted into Class A shares of the Bank of Cyprus (voting rights and dividends)
    • 22,5% is temporarily  frozen, until an independent valuer is appointed that will decide whether it will be converted partly or all into Class A shares. This will be completed in 90 days from the completion of the valuation (if 22,5% is re-deposited then interest and increment will be given retrospectively)
    • 30% is temporarily frozen and will be unfrozen soon. Interest on this amount is still calculated and an increment of 10 basic points.
    • 10% has been unfrozen, after the instructions of the Central Bank of Cyprus, on the 2nd of April 2013.
• Multiple deposit accounts: the deposit amount will be considered as the sum of all the accounts.

Proposed Measures:

The following measures have also been proposed but not approved yet:

• Increase of corporate tax from 10% to 12.5%
• Increase of the withholding tax on interest on deposits from 15% to 30% (this applies only to Cyprus tax residents)
• Increase of the withholding tax on payment of dividends from 20% to 30% (this applies only to Cyprus tax residents)

For any further information, please contact Katerina Charalambous at katerina.charalambous@eurofast.eu

Temporary restrictive measures on transactions of Cyprus Banks (Latest Update)

The Central Bank of Cyprus has applied the below measures and restrictions but these are temporary in order to regulate the flow of capital in Cyprus and safeguard the stability of the economic system. These measures are being reviewed and changed as the days passes. The Central Bank of Cyprus has announced the fourth set of measures, relaxing their previous to great extent restrictions. The current restrictions are as below:

1. Each individual is allowed to withdraw on a daily basis in cash the amount of €300.
2. Cheques are not allowed to be cashed immediately; these can only be deposited in an account and then restrictions mentioned above applicable.
3. Any non-cash payment or money transfer outside the Republic of Cyprus or to any account maintained from another credit institution is not allowed, other than:
   1. Payments through cheques to accounts held in other credit institutions up to €9,000 per month per natural person in each credit institution.
   2. Payments to other credit institutions for transactions that fall within the normal business activity of the customer upon presentation of justifying documents as follows:
      1. Payments of up to €5.000 per day per account are not subject to any restrictive measure. (However the Committee may ask for  information for these payments)
      2. Any payment above €200.001, subject to prior approval by the Committee, at the request of  the credit institution. The Committee will take its decision in 24 hours        according the availability of cash in the Bank.
   3. Payments to accounts held abroad for transactions that fall within the normal business activity of the customer upon presentation of justifying documents as follows:
      1. Payments of up to €5.000 per day per account are not subject to any restrictive measure. (However the Committee may ask for information for these payments)
      2. Any payments from €5.001 to €200.000 will have to be approved by the Committee. The Committee will take its decision in 24 hours according to the availability of cash in the Bank.
      3. Any payment above €200.001, subject to prior approval by the Committee, at the request of the credit institution. The Committee will take its decision in 24 hours according the availability of cash in the Bank.
      4. Payments for salaries of employees upon presentation of supporting documents
   4. Maintenance costs up to € 5.000 per quarter including tuition fees of a person studying abroad and first degree relative is a person who is ordinarily resident in the Republic. Payments for maintenance expenses are allowed only when supporting documents are shown to the bank and these should be presented to the bank by a first degree relative. A birth certificate or a confirmation would be accepted.
   5. Any payments or money transfers via debit, credit, or prepaid card, up to € 5.000 per month per person per Bank.
   6. Termination of deposits before the expiry date is not allowed unless the funds will be used for paying off loans within the same bank.
   7. The restrictive measures will apply to all accounts, payments and transfers regardless of the currency domination.
   8. For travelling abroad more than €1000 per person/per journey is not allowed to be taken outside the Republic.

The above restrictions are not applicable to the below:

1. Any new funds transferred from aboard to Cyprus;

2. Change of cheque that is issued by a foreign bank and/or withdrawal of cash through debit, credit or through prepaid card issued by foreign banks;

3. Withdrawal of cash from foreign account;

4. Withdrawal of cash from Credit Banks through the Central Bank;

5. The Cyprus Government Authorities;

6. The Central Bank of Cyprus;

7. Payments that have been approved by the Committee;

8. Diplomatic Missions

Please note that different procedures are applied in each bank and we are happy to offer you solutions. For further information please contact our banking team at banking@eurofast.eu.

The next day

As a result of the banking crisis, the measures to be implemented are expected to reinforce the Cyprus’s banking system and make it healthier and fundamentally stronger. Despite the crisis in the banking sector, it is important to highlight that the corporate sector in Cyprus still stands strong as nothing has changed on those benefits Cyprus offers to international businesses when it comes to corporate structuring. The Cyprus Banking crisis is not a barrier to transactions and investments in or through Cyprus. The use of Cyprus companies in international structures has not been affected and their use is still highly efficient. The ambiguity created by the recent developments in the banking sector has not affected the demand for structuring projects and investments with the use of Cyprus companies. The proposed increase of corporate tax rate from 10% to 12,5%, will still place Cyprus as a low tax jurisdiction within the European Union.

Moreover, the advantages of holding companies, the majority of companies registered in Cyprus, will not be affected as the rule of no withholding taxes will not be changed. There is zero withholding tax on payment of dividends to non-tax residents, while there is a zero capital gains tax for transactions that do not involve immovable property situated in Cyprus.

The extensive double tax treaty network of Cyprus is still in place offering its benefits to the great number of foreign investors in the island. The Cyprus companies are still enjoying the tax incentives offered, the EU Directives, which have been fully implemented in Cyprus, are still applicable and the high level of confidentiality and secrecy rules have not been shifted. Cyprus Companies, such as financing, holding, trading, royalty (for which the effective tax rate, after the application of the measures will be 2,5% instead of 2%) and more, have not lost their advantageous edge and benefits.

International Cyprus Trusts, which are significantly used for protection of assets and preservation of family wealth, have provided considerable beneficial tax advantages which have not been altered. Their provisions and their application is still fully effective and in force.

For many years now, Cyprus has achieved and gained its title as a solid economic and business model worldwide and the recent developments cannot alter this. The existing legal system, the beneficial tax regime and the qualified professionals that have provided high quality services to local and foreign investors are intact and still well-built.

Cyprus, despite all, remains an attractive international business centre.

Our company is ready and able to assist clients by offering alternative for your banking operations, in parallel to the Cyprus Bank accounts and for this transitional period. We have established an international network which can offer multiple and different banking options worldwide. Our banking solutions include but are not limited to: Switzerland, UK, Jersey, Balkans, Saint-Vincent, Latvia, Tanzania, Monaco, Offshore Jurisdictions.

For any further information, please contact Katerina Charalambous at katerina.charalambous@eurofast.eu

Cyprus Bailout: Legal rights and options

Many clients worldwide are considering their options in order to protect their deposits from the bank levy imposition. We have highlighted below the most prominent legal actions that are available in theory, as suggested and discussed by the legal sector in Cyprus:

1. Interim Order:

Interim Orders have already been used by a number of Cyprus and non-Cyprus residents as a first step in protecting their deposits. The Cyprus courts can issue an interim order, after an ex-parte application, and prohibit the imposition of the bank levy on an account or the use of deposits by any bank without the court’s final decision. This order is only temporary and will not allow the imposition of the bank levy or any treatment by the banks for deposits in Laiki until the case goes to trial and the final decision or a new order is held by the Court.

The interim orders can be argued based on the latest legislation for the protection of depositors and consolidation of credit institutions of 2013, which provides for a reasonable compensation.

Indeed a Chinese Depositor in Bank of Cyprus has obtained today an Interim Order blocking his deposits in the Bank of Cyprus of EUR15 million for a fixed period of time on grounds that the levy measure is against the provisions of the Constitution. There were also similar orders granted today for similar requests.

2. Bilateral Investment Treaties or Multilateral Agreements

Cyprus has more than 15 Bilateral Investment Treaties (BIT) concluded up until today with certain countries (the BIT with Russian Federation has not yet been ratified). Disputes are usually dealt through diplomatic channels and if an agreement is not reached then through an independent arbitral tribunal.

The main argument can be that the bank levy will be an expropriation in which case Cyprus can justify the bank levy as by reason of national interest, public purpose or security. BITs provide that for such a measure to be accepted a fair and effective compensation must be provided, at the actual value of the investments.

Cyprus is also a party to the Multilateral Investment Guarantee Agency Convention and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

3. Violation of EU Law

Such case can be brought under Cyprus Courts or European Courts with the argument that the right of free movement of capital (which is one of the founding EU principles) has been restricted and so directly violated.

4. Violation of European Convention of Human Rights

A claim can come before the European Court of Human Rights, as the imposition of the bank levy on savers’ deposits can be violation of human rights by the Cyprus Banks, according to the provisions of the Convention, and a fair compensation needs to be provided to the depositors.

For any further information, please contact Myranda Chatzimatthaiou at myranda.chatzimatthaiou@eurofast.eu

Changes in Cyprus Tax Legislation

1. Saving of books and records

For income tax purposes, companies should now keep their accounting records for six years instead of seven, after the end of the tax year to which they relate to. For VAT purposes, the period for keeping accounting records remains to seven years.

2. Keeping books and records

Persons, who receive income from dividends and interest, whether originated from sources within or outside the Republic, are obliged to keep accounting records.

3. Provisional tax

The submission of the provisional tax assessment should be made before 31st July of the current year instead of 1st August.

Provisional tax payments should be made in two instalments instead of three that was applicable until now. The first instalment must be paid on 31st July and the second on 31st December of the current year.

4. Employer’s Return (IR7)

The Employer’s Return (IR7) is now compulsory to be submitted electronically until the 31st of July of the year following the year of assessment.

5. Income tax returns of employees (IR1)

The submission date of annual income tax returns of employees is extended from 30th April to 31st July following the year of assessment in case that the submission of the return is made electronically. Alternatively, if the submission is made by hand the deadline remains 30th April.

6. Income tax returns of non tax residents

Companies which are incorporated in Cyprus but are not Cyprus tax residents must also submit an income tax return to the Director of Inland Revenue Department until the 31st December of the year following the year of assessment.

7. Increase in the penalty for fraudulent omission or delay in tax payments

Fraudulent omission or delay in tax payments by a natural person is subject to imprisonment for at least one year. Previously, imprisonment term would not exceed six months.

8. Capital gains tax

Any lease of immovable property which is registered with the Department of Lands and Surveys and any further disposal are taxable under Capital Gains Tax.

A disposal is considered to take place upon registration of the lease with the Department of Lands and Surveys and not upon the date of signature or commencement of the lease, and is applicable for the remaining years.

Buildings which are constructed by the lessee are considered as a gain for the owner of the immovable   property.

9. Double tax relief

Between Cyprus and Germany

On 16th December 2011 the agreement between Cyprus and Germany for double tax relief came into force. The agreement concerns taxes that are withheld at source from income that is payable or paid by 1st January 2012 and onwards as well as other taxes on income on or after 1st January 2012. The terms of the agreement dated 9th of May 1974 between Cyprus and Germany cease to apply.

10. Rental income subject to special defence contribution

Individuals who are Cyprus tax residents and earn income from rent are subject to Special Defence Contribution.

If the tenant is a Company, then it is obliged to withhold the Special Defence Contribution from the monthly rent paid to the owner and pay the tax to the Inland Revenue department by the end of the following month.

11. Value Added Tax

From 1st March 2012, the standard VAT rate increased from 15% to 17%. For the period from 14th January 2013 to 12th January 2014, the standard VAT rate will be 18% and as from 13th January 2014 will increase to 19%.

As of 13th January 2014, the reduced VAT rate will increase from 8% to 9% for the following categories:

• Transport of passengers and their accompanying luggage in the Republic, with civil, intercity and rural taxis and with tourist, excursive and intercity buses.
• Restaurant and catering services (except sales of alcoholic beverages, beer and wine).
• Accommodation in hotels and resorts or similar.

12. Social Insurance

From 2014, employers’ and employees’ social insurance contributions will increase from 6,8% to 7,8%. Also, social insurance contribution for self employed individuals will increase from 12,6% to 14,6%.

13. Amendments on IP rights

House of Representatives passed the amendments to the Income Tax Law in May of 2012.

The amendments to the law provide that 80% of any income generated from IP rights will be exempt from Corporate Income Tax (CIT); therefore only 20% of the profits generated from IP rights (royalties) will be subject to CIT at the rate of 10%. This tax treatment is also applicable to any profit made from the future sale of the IP rights.

Furthermore, the law permits the deduction of all expenses resulting from the production of the royalty income, so, the amount to be paid may be reduced even further.

With regard to capital expenditure it should be noted that the Cyprus IP Company will be able to write off any capital expenditure for the purpose of the acquisition or development of the IP rights. Such a write off will be permitted for the initial five years of use. Straight line capital allowances at the rate of 20% will be applicable for the first five years of use. Consequently, a Cyprus IP Company will effectively be liable to a maximum tax of 2%, as it is only taxed on 20% of its profits in case of royalty income.

The amendments to the law have come into force on 6 July 2012 and have a retroactive effect as of 1

January 2012. In addition, it is expected that within the coming weeks the Cypriot Tax Authorities shall issue a circular providing detailed guidelines on the practical operation of the latter law.

For any further information, please contact Michalis Zambartas at michalis.zambartas@eurofast.eu

 

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