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Myranda Chatzimatthaiou |
On April 14 2011, just nearly two weeks after Standard and Poor's, a rating agency, downgraded the debt grade of Cyprus from A to A-, parliament unanimously passed a new legislation relating to banking institutions. The Tax and Rescue Fund Law approves the imposing of taxes on deposits of banking institutions and aims at creating a financial stability fund that will help support the credibility of the local financial system and safeguard the deposits of investors.
According to the new piece of legislation, the full amount of deposits of local banking institutions will be subject to a 0.095% tax. In particular, the levy will be imposed on commercial and cooperative bank deposits and it is expected to raise approximately €120 million ($170 million) by 2013. The tax will be imposed both on local as well as cross-border deposits. In particular, the deposits have been defined as:
"an amount of money, expressed in any currency, paid or received on terms under which such amount will be repaid with or without interest, or at a premium, either on demand, or at a fixed date, or under conditions agreed between the payer and the recipient of the amount, but where these terms are not related to the supply of goods, or property, services or to the issuing of shares or debentures".
From that amount, €50 million will be intended for a bank deposits stability fund. Even though Athanasios Orphanides, Governor of the Central Bank, remarked that "the initial aim was for a fund of €500 million, he stated that this fund is of great importance to the credibility of Cyprus financial system". He further commented that "in the case where the financial sector is in trouble, then, in order to support this sector sufficiently, the fund will need almost €500 million or 3% of the national income. This independent protection fund will be created by the Central Bank of Cyprus, within the next six months, according to its regulations. The deposit fund will be utilised only for the protection of investor's deposits and not to aid any struggling bank".
The other €70 million, from the target of €120 million of the new tax, will be forwarded towards the state's coffers. This particular amount for the state is purposed to be used for the economic deficiency and the public debt of Cyprus, which is aimed to boost the state revenues.
Although, the original intention of the legislators was for the tax to expire after two years, until in 2013, this was not retained. Two of Cyprus political parties passed their motion, according to which the levy should be open-ended and so to become permanent, in order to continue producing money for the bank deposit fund. The rate of the tax will be determined by the Central Bank of Cyprus.
The legislators were eager to protect the customers of banks and to prevent any unfair practices and so an amendment of the new legislation prevents the banks from transferring the levy by charging their customers. In case where a bank is found to be engaged into such practice, a fine of €100,000 will be imposed on the bank.
This new legislation is set to be one of the measures of the Cypriot government against the recent downgrading and possible new downgrading of its sovereign ratings by a number of rating agencies, basically due to the exposure of Cyprus fiscal system to the Greek debt.
Myranda Chatzimatthaiou (myranda.chatzimatthaiou@eurofast.eu)
Eurofast Taxand, Cyprus
Tel: +357 22 699 222
Website: www.eurofast.eu
