In exchange for the aid package, Cyprus undertakes to reduce the budget deficit, in particular, by increasing taxation and introducing a banking reform.
Currently, the primary measure being considered is the introduction of a one-off tax for individuals and legal entities on bank deposits (including funds on depository and current accounts) opened in Cypriot banks, including Cypriot branches of foreign banks. The exact rate of tax is currently being discussed.
Originally, the tax rate on banking deposits was set at 6.75% for amounts up to 100 thousand Euro and 9.9% on amounts above the given sum. However, according to the latest information, the tax on deposits of amounts below 100 thousand Euro could be lowered to 3%, while the rate applicable to deposits above 100 thousand Euro would be increased to 12.5%.
Possibly, the Government would provide compensations to depositors in the form of shares in the respective Cypriot banks or government bonds in the amount of the tax withheld.
At the moment, all funds on the bank accounts in Cyprus are frozen and the work of Cypriot banks will be either placed on hold or restricted during the next few days.
Most likely, the fate of the legislation will be decided in the evening of 19 March, 2013.
Other measures regarding Cypriot tax legislation include:
- Increase of the corporate income tax rate from 10% to 12.5%.
- Increase of the Special Defense Contribution on passive interest income from 15% to 20%.
- Introduction of a “solidarity tax”. This tax will be imposed for a term of three years and shall be applied both to Cypriot and foreign taxpayers. A flat 10% tax will be applied on interest income received from Cypriot banks.
Please note that the above information is of a preliminary nature. We would be pleased to assist you in the analysis of the potential tax consequences of the proposed changes on your business operations. Should you have any questions, please do not hesitate to contact us.