Cypriot Banks Issue Tax Warning

by Lorys Charalambous, Tax-News.com, Cyprus

28 November 2011

Foreign banking institutions in Cyprus have warned that any increase in their tax bills may drive their business abroad as the government considers new revenue sources to cut the deficit and set up safeguards against banking sector collapse.

Urging the government to maintain current tax rates, the Association stated: “The favorable tax environment of Cyprus has been stable for many years and this has attracted a large number of international banks and other investors; this stability is now under considerable attack.”

The statement comes as the Cypriot government is considering proposals for banks to contribute to a fund that would stabilize the country's banking sector in time of need. The Association said it saw such a proposal as a tax increase that could heavily impact their operations' profitability, which could potentially prompt them to consider more tax-effective locations.

In April this year, Cypriot lawmakers approved legislation to introduce a permanent levy on the country’s banks, revenues from which will be siphoned into a ‘Financial Institutions’ Support Fund.’

Expected to generate EUR60m annually, a proportion of the levy in its first two years will contribute to efforts to tackle the nation's deficit, but from 2013 will wholly contribute towards a ‘Financial Institutions’ Support Fund’ to establish a buffer to protect the country against financial shocks.

The levy will impose a tax amounting to 0.095% on deposits of Cypriot banks (excluding foreign deposits), Cypriot subsidiaries of foreign banks, co-operatives, and branches of credit institutions. It will be calculated based on a bank’s total deposits (local and cross-border) as at December 31 each year. Deposits from foreign financial institutions and domestic interbank deposits will not be included in this calculation.

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