Cyprus Tries to Safeguard International Investment?

March 20, 2013 Taxation in Cyprus

Cyprus BailoutNICOSIA – The proposal to enact a tax on bank deposits in Cyprus will inevitably hurt the citizens of the country, but the main impact will be felt amongst the international entrepreneurs mainly from Russia and the Ukraine.

The decision of the parliament of Cyprus on March 19th to reject a proposal to enact a once-off levy on deposits held in local banks and financial institutions has sparked a fresh round of heated discussions and speculations, which initially came to the attention of international tax experts late last week.

Currently the major support for the proposed plan comes from the European Commission, International Monetary Fund, and the European Central Bank, who collectively claim that enacting the tax is the best option for Cyprus given the country’s current fiscal and economic position, and they suggest that rejecting the tax would jeopardize the country’s bailout loan agreements, and would ultimately lead to damaging economic repercussions.

However, opponents of the tax are contesting that the measure is ultimately unfair, and would hurt everyday individuals who hold their money in the bank.

So far, some of the loudest international opposition to the proposition has come from Russia, where even the president Vladimir Putin has come forward to call the proposed levy unfair, unprofessional and dangerous.

The position voiced by Vladimir Putin is fueled by the fact that according to official statistics nearly 37 percent of all foreign direct investment into the economy Cyprus comes from Russia and the amount of direct investment into Russia from Cyprus, the smallest economy in the EU, amounted to nearly USD 130 billion in 2011, thoroughly overwhelming investments coming from Germany, US, UK and other developed nations.

Ukraine investors have also found themselves to be in the same boat as Russian businessmen, as more than 90 percent of all foreign investment into Ukraine comes from Cyprus, and in 2011 alone about USD 10 billion worth of direct investment into Cyprus came from the Ukraine.

Comparatively foreign direct invest into Cyprus from the USA in 2009 was only 1.7 percent of all inward flows for the year.

According to reports leaked from the German intelligence agency Bundesnachrichtendienst (BDA) leaked late last year, any bailout provided by the international society to Cyprus will mainly benefit Russian businessmen who in 2011 alone invested more than USD 26 billion into Cyprus, an amount which is greater than the entirety of the country’s GDP, and the overall annual cash flows between Cyprus and Russia is expected to be nearly USD 80 billion.

According to reports in international media, the Russian gas-giant Gazprom has already offered its own economic bailout package to Cyprus which could help Cyprus to stay afloat.

The parliament of Cyprus is now tasked with coming to an agreement on an amended version of the rejected levy, or, alternatively, finding new means of raising an equivalent amount of tax revenues in a short time.

The EUR 10 billion bailout levy was first proposed last week by the European Commission, International Monetary Fund, and the European Central Bank.

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