The Cyprus crisis and its international tax regime: what multinationals should know

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Cyprus has been a member of the European Union (EU) since 2004. The country has long been known for its low corporate income tax rate and absence of withholding taxes on payments of interest, dividends and royalties paid to non-residents. This attractive tax environment, coupled with an extensive network of double tax treaties and favourable corporate laws and freedom of capital within the EU, has made Cyprus a centre for multinationals establishing holding companies, investment funds, trusts and other special-purpose entities.

The financial stress in Cyprus is different from that in other EU countries. It does not stem from a sovereign debt crisis and deep government deficits. Rather, the financial crisis arose from the investments that a number of Cypriot financial institutions made in Greek bonds and other assets with severely depressed valuations. In an effort to stabilise these banks, the Eurogroup of finance ministers, along with the International Monetary Fund, has agreed to a €10bn package of assistance for Cyprus. As part of the package, the Central Bank of Cyprus placed significant withdrawal restrictions on depositors, which are gradually being relaxed by decrees issued on a weekly basis by the Central Bank of Cyprus. In a recent relaxation, the restrictive measures for branches and subsidiaries of qualifying foreign banks in Cyprus were lifted completely, with the result that these banks are now fully exempt from the capital controls in connection with transactions of their international business clients…

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