Eurogroup Agreement – Cyprus Banking Crisis

Eurogroup Agreement – Cyprus Banking Crisis

The finance ministers of the Eurozone make up the Eurogroup, a body that exerts political control over the Euro in order to manage its stability.

With regard to the current financial and economic situation in Cyprus, the Eurogroup has reached an agreement with the country in order to gain cohesion and prevent collapse of the Cypriot banking sector.

The terms of the Eurogroup agreement include the Cyprus Government to receive €10bn of financial assistance; the European Central Bank to maintain liquidity of the Cyprus banking system; Cyprus’ largest bank to absorb the second largest bank (Bank of Cyprus and Laiki Bank respectively); and the safeguarding of bank deposits of up to €100,000 (per legal entity, per bank) in accordance with the EU principles.

Other banks and institutions apart from the Bank of Cyprus and Laiki Bank will not be affected, and this protection extends to branches of foreign banks in the country as well.

An increase of Cypriot Corporation Tax has also been proposed, meaning the tax will rise from 10% to 12.5%, although legislation has not yet been passed.

The Cypriot tax regime will not change in any other way and Cypriot companies will still benefit from the various tax exemptions previously available. These include full participation exemption on capital gains, full participation exemption on income from dividends, withholding tax exemption for dividends, interest and royalties, no thin cap rules, no CFC rules, no exit charges, tax reduction on royalty income, and thin margin taxation for interest income.

As a result the Cypriot tax regime remains favourable to foreign investors. Although the banking sector is under stress, the country is still one of the lowest corporation tax jurisdictions in the EU and international business can therefore still operate fully and successfully in the country.