Eurogroup: Cyprus Financial Programme – Update

George Themisthoucleos, AudiChart Ltd; Cyprus

Introduction:

On March 25th 2013, the EUROGROUP has reached a decision that was imposed on the Cyprus Government for the alleged “Bail-out” of the Cyprus economy. The Central Bank of Cyprus and the relevant authorities are still working on the decision and are expected to announce in the days to come the implications of this decision. From our analysis of the various reports in the media we summarise below our understanding, as of this point in time, of the alleged “solution”:

Main provisions of the decision:

A.   Laiki Bank – Restructuring and Creation of a Good Bank and Bad Bank Model

  • Laiki Bank, the second largest bank on the island, will be split into a Good Bank and a Bad Bank; the Good Bank will be merged with another financial institution – most likely the Bank of Cyprus

  • All deposits/balances below €100,000 (Good Bank) will be transferred to the Bank of Cyprus

  • All deposits/balances above €100,000 (Bad Bank) will remain with Laiki Bank as part of the Liquidation process

  • The deposits/balances held by Provident and Pension Funds will all be transferred with no limitation on the amount to the Bank of Cyprus, although this remains to be confirmed

  • For the purposes of this restructuring the €100,000 limit is calculated by natural or legal person; hence, all accounts belonging to  the same person or entity will be merged together

  • Laiki Bank and the Bank of Cyprus will remain closed on 26 March and 27 March 2013 in order for the IT departments to fully merge the systems of the two banks

B.   Bank of Cyprus – Recapitalisation

    • All deposits/balances below €100,000 are secured by the Cyprus Central Bank under the European Directive

    • All deposits/balances above €100,000 will be subject to a “haircut” (or some other technical term) in the region of 30% to 40%

    • The exact percentage of the haircut has not been fully calculated yet

    • As compensation for the haircut the deposit/balance holders will be given shares in the Bank of Cyprus

    • The Bank of Cyprus will assume the Emergency Liquidity Assistance balance (already provided to Laiki Bank by the European Central Bank) which is estimated at €9.2 bln

C.   All Other Banks

    • All other Cypriot Banks and Cypriot Branches of Foreign Banks will not be subject to the above restructuring measures

    • However, all Banks in Cyprus, including Cypriot Branches of Foreign Banks, will be subject to the Emergency Measures for the control of Fund Flows

D.   Emergency Measures for the Control of Fund Flows

    • A special legislation has been imposed to give the Government of the Central Bank of Cyprus, as to the authorised representative of the European Central Bank in Cyprus, full powers to impose emergency measures on fund flows

    • These measures will be imposed on all transfers out of Cyprus, within Cyprus and between accounts in ALL the Banks and Branches of Foreign Banks in Cyprus

    • The details of these measures will be announced in the next few hours

    • It is expected that the banks will re-open tomorrow 28March 2013

E.  Other provisions

The measures which were announced earlier are not likely to charge are an increase in the corporate tax rate from 10% to 12,5% and an increase in the Special Defence Fund Contribution on interest income from 15% to 20%-25%. Apart of the above, no other charges have been introduced on Cyprus tax legislation. Therefore the provisions:

    • For Cyprus Holding Companies providing full exemption on dividends income

    • The IP regime providing 80% exemption from profits from the exploitation of intellectual properties rights

    • The 0% withholding tax on dividend payments to non-residents

    • The exemption on capital gains on disposal of shares and other securities (also for immovable property situated outside Cyprus) and zero financial transaction tax are still fully applicable and all Cyprus tax resident companies will be able to continue enjoying all the above.

March 2013

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.  No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Auditchart Limited, its directors, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.