Cyprus Finance Minister announced an increase in the corporate tax

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imagesAfter the haircut on deposits over 100,000 EUR and the restrictions on ATMs withdrawals and bank transactions, the Finance Minister of Cyprus has explained the new financial measures to be taken by the executive. The Central Bank published yesterday two government decrees on Laiki Bank and Bank of Cyprus (BoC) that came into effect from 6pm on Friday. A total of 37.5 per cent of deposits larger than €100,000 in the Bank of Cyprus will be converted to shares, and an additional 22.5 per cent will be frozen for up to 90 days but may be converted to shares in order to recapitalize the bank. The owners of those shares will have voting rights in the BoC’s general meetings and will have dividend rights, allowing them a share of any BoC profits made in the future up until the point they regain the amount that got converted into shares plus interest. If any part of the withheld 22.5 per cent is returned to depositors, they will then be given interest on their savings in arrears plus a small surcharge, the Central Bank said. The remaining 40 per cent is also temporarily frozen but will continue to attract interest as normal. The measures are per individual customer, so if two people have a joint account of €200,000, then each person will be thought to have €100,000 and will not incur a haircut. The deposits that are subject to a haircut may be in separate accounts. So if a person has €150,000 in three separate BoC accounts, €50,000 will be subject to a haircut. The BoC’s existing capital, including existing bonds and shares will also be converted in shares but will not carry dividend or voting rights for their owners. Deposits under €100,000 in Laiki will be transferred to the BoC. All deposits belonging to credit institutions, insurance companies, the government and other public bodies such as local authorities and municipal councils will also be carried over to the BoC. The same applies for charity foundations, schools and educational bodies and deposits belonging to the country’s main bank card transaction agency, JCC Payment Systems Ltd. Depositors who move from Laiki to the BoC are not part of the haircut. The deposits that will not be transferred to the BoC will be part of a bad bank that will undergo resolution, i.e. an orderly winding down. Although the money will be there nominally, depositors will not have access to their money for an indefinite amount of time. As the bad bank slowly starts tidying up its account books, cash would then start going into the accounts, but the depositors could lose a substantial part of their savings if the bad bank fails to fully recoup all of its bad assets, as expected by analysts. The Minister has informed the Institute of Chartered Accountants that it has been agreed that an increase in the corporation tax (12.5%) and an increase in the rate of withholding defense levy on interest receivable deposits and dividends (30% both). Note that it will remain that only Cypriots will have to pay the defense contribution tax and not foreigners. Eltoma will keep you informed of any new information and developments.