COVER STORY
YES XXX WE CAN
Tough Measures
By Andreas Christofides
Will Bring Stability
FOR INVESTORS, CYPRUS STILL HAS ONE OF THE MOST FRIENDLY TAX SYSTEMS IN EUROPE
C
yprus is facing its largest financial crisis since the Turkish invasion in 1974. Indeed, some analysts claim that the situation now is even worse. A series of decisions at the European level, together with structural problems in the Cyprus economy, led the country to ask for financial assistance from the European Commission, the European Central Bank and the International Monetary Fund (“The Troika”) in June 2012. The negotiations resulted in the Eurogroup’s decision on 25 March to resolve Laiki Bank and restructure Bank of Cyprus, which will be recapitalized through a deposit/equity conversion of uninsured deposits. I appreciate the fact that depositors in the two banks will be seriously affected and that this will undermine the confidence of investors in the Cyprus banking system. However, I believe that through hard work we will manage to stabilize the business environment and bring the economy back to growth. The agreement on a financial support package, although onerous in some of its terms, will bring back stability to the market and eliminate uncertainty. The European Central Bank’s decision to allow the use of the Emergency Liquidity Assistance mechanism will provide sufficient liquidity to the financial system, so as to absorb possible reactions by depositors. The financial services sector corresponds to 40% of the country’s Gross Domestic Product, contributing €8 billion to the national budget. Any shrinkage of the sector will undermine the country’s ability to repay its debt, something which raises questions about the Eurogroup’s intentions when tak-
The increase in th corporate tax rate e is manageable and expected to negais not ti affect internatiovnely business in Cypr al us
ing its decision on a deposits haircut. The decision also provides for a 2.5% increase in the corporate tax rate to 12.5% and a flat solidarity fee of 10% for three years in relation to bank interest income. The increase in the corporate tax rate is manageable and is not expected to negatively affect international business in Cyprus in any significant way. Cyprus will still have one of the most friendly tax systems in Europe with no taxation imposed on the sale of shares, full participation exemption on dividend income, no withholding tax on dividends, interest and royalties, no thin cap rules, no exit charges, effective tax on royalty income of 2.5%, interest income taxed being taxed only on a thin margin only and so many other benefits. The process of resolution of the two largest financial institutions in the country will surely cause a lack of liquidity in the market, driving Cyprus into a long depression period. The European Commission predicts that the economy will shrink by 15% this year. It is therefore necessary to take measures that will confine the negative effects of the bailout agreement. We need to provide tax and other incentives for repatriating funds that will be invested in the real economy and for attracting foreign investments, especially businesses undertaking Research & Development. It is essential to reduce bureaucracy and create fast-track procedures for new investments, and automating IT systems need to be put in place in government departments, especially the office of the Registrar of Companies and the Inland Revenue. The coming months will be extremely difficult since the decisions relating to the two major banks will affect both Cypriot businesses and the confidence of foreign in-
vestors. However, the other financial institutions have not been materially affected and, hopefully, no significant outflow of deposits will be experienced in foreseeable future. We need, though, an immediate plan to assist local companies to overcome the initial shock and return as quickly as possible to ‘normal’ operations, thereby safeguarding as many jobs as possible, followed by a full and comprehensive strategic plan that will bring the economy back to growth. Besides its attractive tax system, Cyprus still has a lot of competitive advantages, such as its geographical location and highly educated manpower. KPMG has drafted a plan targeting specific categories of investors to help Cyprus regain its credibility and attract new investments. I personally believe that the Government should speed up the processes for developing the structures necessary for the commercial exploitation of the country’s natural gas resources. This will give a boost to the economy and generate new jobs while, at the same time, Cyprus will have the opportunity to make alliances with other countries. Finally, we need to implement targeted measures to enhance the quality of our tourist product, since that industry can help the economy reduce the negative effects of the Memorandum.
info: Andreas Christofides is the Managing Director of KPMG Ltd in Cyprus.
28 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS
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