Important updates for Cyprus jurisdiction and bank system

25.06.2013

Cyprus reached recently this year according with the recent agreement, a series of measures regarding the tax rates.
Since 1st of January 2013 the corporation tax in Cyprus is levied at a flat rate of 12.5%. Till 2013, the corporation tax rate was 10%, but in 2013 the new rate is 12.5% following the agreement for a bailout plan reached by Government of Cyprus and the European Commission, the European Central Bank and International Monetary Fund.
Also, the Special Defence Contribution on interest income has been increased from 15% to 30% effective as from 29 April 2013. SDC on interest income is payable by Cypriot tax resident individuals or companies. Non tax residents are exempted from SDC. In addition, interest income arising from the ordinary carrying on of the business i.e. corporate financing, is taxed under CT at 12.5% after taking into consideration allowable deductions.
According with Law 188(I)/2012, tax losses were carried forward indefinitely, however with the recent changes the tax losses of any year will be carried forward only for a period of 5 years.

Holding structures should not be affected in practice by the above mentioned changes. Forwards the divided income is exempt from CT and in most situations (subject to easily met conditions) is also exempt from SDC. Furthermore, holding companies do not usually have tax losses so as to be affected by the new time limit on carrying forward losses.
To the extent that financing structures are concerned, the real effect is an additional 2.5% CT on the net profit due to the increased rate. Though, the predefined profit margins recently recognized by the tax authorities on back to back financing arrangements, allow for a low effective tax rate on arising interest income.
Whole, the tax benefits provided by the Cypriot tax system are still preserved.
Regarding the new deposits subject to the restrictions imposed by the Central Bank of Cyprus, the new funds from abroad or from other Banking institutions in Cyprus which are indicated as new funds with credit value date 28/3/2013 and after are not subject to any of the restrictions imposed on transfer of funds.
About restrictions on transfer of funds, those are usually reviewed on a weekly basis. No specific time has been set for lifting them. Nevertheless, there has been an incremental relax of limitations on transfer of funds since initially imposed.
Payments might be made to records held abroad for transactions that fall within your usual business activity upon presentation of supporting reports as takes after:
• Payments of up to €500.000 per transaction are not subject to prior approval of the Central Bank Committee.
• Payments from €500.001 - €1.000.000 are subject to the approval of the Central Bank Committee.
• Payments over €1.000.001 can be made provided the prior approval of the Central Bank Committee for the specific payment has been obtained.
NOTE: Up to €5.000 per month, funds can be transferred abroad without any supporting documentation
For payments made to accounts held out of Cyprus, using old funds (with value date of credit before 28/0/2013) you still need supporting documents for amount over €5.000 per month.
In case of fixed deposits, it cannot be finished prior to the maturity date except it is used (a) for repaying a loan and/or overdraft and/or credit card granted before 27/3/2013 OR (b) to create one or more fixed term deposits in different names of the identical value and at least equal to the initial term of the original deposit. On the issue of maturity, when the fixed term deposit reaches the maturity, the higher amount between €5.000 or 20% of the total amount (plus interest) can be shifted to a sight/current account upon former request by the client. For the remaining of the full amount, the maturity shall be prolonged for one month or more.
The depositors affected by the current changes in Cyprus may file an administrative action against the decrees issued by the Government and Central Bank and claim that these are unlawful administrative acts. Depositors that are affected may contest the actions of the Government and Central Bank within a non-extendable period of 75 days which expires on 11th of June 2013.
For the situation to open new accounts for existing customers or new ones there is no restriction to be credited with new funds transferred from abroad. If the new clients do not meet the previous criteria then require the approval of the Central Bank Committee. Same applies for credit and debit cards - are not subject to any restrictive measures except for cash withdrawals.
Substitute banking engagements in other countries were also established as a Cypriot company does not have any geographical restrictions on where to operate a bank account. It is also important to say that the funds arriving in Cyprus after the Eurogroup's decision are not subject to the restrictive measures as long as they are not transferred to a different banking institution.