Is Cyprus Considered a Tax Haven?

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Is Cyprus Considered a Tax Haven?

Cyprus officially lost its status as a tax haven when the Organization for Economic Cooperation and Development (OECD) declared that the country, along with Luxembourg and Seychelles, had been found to be largely compliant with the Global Forum on Transparency and Exchange of Information for Tax Purposes standards. The rating is the same as that of the US, Germany, and the United Kingdom.

Cyprus as a Tax Haven

Beginning immediately after the collapse of the Berlin Wall, Cyprus’s government created the nation as a tax haven, primarily targeting Russian billionaires as well as Eastern European people and businesses. The country’s low flat corporation tax rate, tight privacy regulations, and geographic appeal due to its closeness to Europe and Russia all contributed to the tax haven’s success during the next three decades. As a consequence, Cyprus’s banking sector grew to be nine times bigger than the country’s GDP by 2009.

Key Takeaways

  • Cyprus lost its tax haven status when the OECD assigned it the same grade as the United States, Germany, and the United Kingdom.
  • Cyprus’s hike in corporation tax rates to 12.5% is one of the reasons the country is no longer regarded as a tax haven.
  • Cyprus also became the first country to join the Automatic Exchange of Financial Information in Tax Matters.

The Fall of the Cypriot Banking System

Prior to 2012, deposits in the nation’s banking sector had consistently increased, but money started to drain out of the country amid the 2008 financial crisis. Capital outflows slowed in the wake of the crisis owing to depressed property values and global real estate markets. The financial industry was struggling under the weight of Greece’s sovereign debt crisis by 2012, as the amount of nonperforming loans held by Cypriot banks steadily increased.

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By March 2013, the country’s banks were in desperate need of assistance. The government agreed to extraordinary conditions with the European Commission, the European Central Bank, and the International Monetary Fund in order to obtain the financial aid package required to keep the banking sector afloat. One of those requirements was the imposing of losses on depositors at two of the country’s top banks. In effect, the nation seized more depositor funds than were insured and utilized the equity to recapitalize the banking system’s balance sheets.

The End of a Tax Haven

The government also agreed to modify its banking operations in order to lose its reputation as an offshore tax haven as part of the bailout requirements. One of the key criteria was that the government raise corporation tax rates to 12.5%, which is still among the lowest corporate rates in the world for non-offshore firms.

Cyprus began participation in the Automatic Exchange of Financial Information in Tax Matters program, in addition to hiking its corporate tax rate. Countries that participate in the scheme immediately report noncitizen account holders’ tax-related banking information to tax authorities in their home countries. Local tax authorities may use this information to compare information on tax returns to assess whether or not offshore income has been disclosed. In the case of disputes, tax authorities may prosecute their citizens for unpaid taxes. Cyprus’s involvement in this initiative effectively ends the country’s position as a tax haven.

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