Cyprus Government Considers Tax On Stock Market Gains

by Lorys Charalambous, Tax-News.com, Nicosia

17 April 2002

A stock exchange bill drafted by the Cyprus Government at the request of the House Finance Committee came in for heavy criticism when it was first discussed by the Committee yesterday.

Under the bill, profits from stock market dealings would be taxed at up to 20%, but the existing levy on transactions (stamp duty) would be cut to 0.3%.

Representatives of PASEHA, the Stockbrokers' Association and the Union of Public Companies all opposed the bill, arguing it burdened only those who had recently invested in the CSE while letting institutional investors who made millions during the boom year escape taxation. "The last-in-first-out provision will not affect investors who made a fortune in 1999, the boom year of the stock market," KISOS deputy Doros Theodorou said.

The head of the Inland Revenue, Polyvios Rialas, admitted that the proposal was "not in line with the government's tax system simplification objective and its implementation will create huge administrative costs."

He pointed out the bill relied on investors' declarations of profits, adding it would be a nightmare for the department to try and keep track of every transaction made by every individual investor.

Meanwhile, CSE chairman Paris Lenas yesterday submitted his resignation to Finance minister Takis Klerides citing "personal and professional reasons" without giving further explanation.

The Stock Exchange began operations only in March 1996; it is governed by a Stock Exchange Council. The market rose strongly in 1999, gaining 700% to a peak in early 2000, but since then has lost more than 80% of its value. The Government continues to toy with various schemes meant to underpin the market, but investors caught out when the market crashed are still licking their wounds.

It is received political wisdom in Cyprus that the 'fat cats' and stock market insiders made large amounts of money out of the stock market boom that ended in 2000, while ordinary investors were tempted into the market at its height only to be robbed of their savings by unscrupulous operators when the market collapsed. Attempts at reform are therefore bedevilled by political sentiment, and Finance Committee's probable inability to agree over the new bill needs to be seen in this light.

Alongside its trading problems, and partly as a result of them, the CSE also has major structural and governance problems, with incessant disagreements betwen stockbrokers, investors' representatives, the government and the CSE itself.

Currently there is little foreign interest in the Cyprus stock market, although in March 2002 a step was taken towards reinvigorating the stock market when a co-operation agreement was announced between the Cyprus Stock Exchange (CSE) and the Athens Stock Exchange (ASE), which will include provision for the setting up of a Cyprus derivatives market.

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