Protests on the streets of the Cypriot capital of Nicosia. Investigations into capital flows in Malta and Liechtenstein.
Lawyers feverishly dreaming up new ownership schemes in Moscow and Riga. The first stage of the Cyprus bailout crisis may be over, but its ripples will be felt for years to come.
Since signing a double taxation treaty with the Soviet Union in 1982, Cyprus has been the haven of choice for East European clientele seeking to avoid taxes on their investments, hide assets or launder suspiciously earned money.
Home to countless holding structures, the small island is the biggest foreign investor in Ukraine and Russia by far, accounting for 29 and 32 percent of foreign direct investment, respectively, according to a report by Morgan Stanley. But capital controls and efforts to track financial flows are scaring firms away.
“Investors, including Ukrainian ones, will seek other jurisdictions… One alternative to Cyprus can be Great Britain, a fairly respectable jurisdiction… Another interesting alternative is Switzerland, a traditional jurisdiction for keeping money or getting it into Europe,” Ruslan Popovych, a lawyer from Goldblum and Partners, said at an Interfax-Ukraine press conference on March 27.
The unconventional bailout terms for Cyprus hit depositors, leaving corporate structures relatively unaffected. However, the week between the controversial decision to tax all depositors, even those with insured accounts below 100,000 euros ($129,000), and the alternative that would limit losses to those above the threshold, got companies thinking.
Capital controls have further damaged the haven’s reputation. After being closed for more than a week, Cypriot banks re-opened for business on March 28 with severe restrictions: 300 euros of cash withdrawals per day, transfers exceeding 5,000 euros will require central bank approval, international credit card withdrawals are limited to 5,000 euros per month and students abroad will be allowed to receive 10,000 per semester, and only from their immediate families.
Initially planned for seven days, the capital controls are likely to be rolled over for as long as possible, experts say. The low corporate tax rate of 10 percent is also set to be raised.
The gateway to Europe, or “Russia’s Trojan donkey,” as some EU officials reportedly describe the island, will lose its luster if it is unable to function smoothly, and cheaply.
“I think that once the trust has been lost, it will be quite difficult for Cyprus to regain it,” Oksana Kneychuk, tax partner at AstapovLawyers, told the Kyiv Post. “We have lots of inquiries from clients looking for other options, and not only in Europe, but in Singapore and the United Arab Emirates. Hong Kong is not good for Ukraine because there is no (double taxation) treaty.”
Indeed, reports have surfaced about banks in Switzerland, Singapore, Dubai, and Latvia contacting Cyprus clients to lure them to their jurisdictions. Latvia, in particular, has for several years been gearing up to become the Baltic offshore of reference for post-Soviet clientele.
At 15 percent, its corporate tax rate is still below that of Russia and Ukraine, though still far higher than such jurisdictions as the Isle of Man or Jersey, which sport a nice, round zero.
But unconfirmed reports that the European Central Bank issued a warning against Latvia for taking in Cypriot accounts of Russian origins have made some prospective clients nervous.
If you have to quickly open a bank account, Latvia is a convenient and compliant jurisidiction, Kneychuk said, but in the long term it is better to look for something more stable.
Meanwhile, regulators are beefing up inspections to track shady flows in the region – an additional factor making clients uneasy about their holdings.
An audit by Moneyval, a financial monitoring arm of the Council of Europe, is due to present preliminary results in coming weeks, though experts warn the short time period means in-depth analysis is unlikely.
Nonetheless, a private auditor has also been hired to produce a report about Cyprus, while US authorities are pushing Liechtenstein, an Alpine haven between Switzerland and Austria, to reveal banking data. Others are starting to raise questions about Luxembourg, which serves as an incorporation jurisdiction for many Ukrainian companies listed abroad.
Ukraine’s entered the fray even earlier, signing a new double taxation treaty that would introduce fees on dividends, royalities and interest in the end of last year. It could also impact transfer pricing, a tax avoidance practice, though it is premature to speak of any results, said Valeriy Bondar, head of HLB Ukraine, an auditing and business services firm.
Others warn that risks of contagion could lead firms and individuals to move capital further abroad. Cyprus is now projected to stay in recession throughout 2013 and 2014, according to the European Commission, while others are nervous about potential losses and bank runs, encouraged .
“Slovenia, Malta, and perhaps Ukraine are most exposed in my view now for contagion risk. Ukraine is exposed through the risk of individual credit events, i.e. while overall Ukrainian exposure is small the risk of a few local oligarchs suffering cash flow problems now via exposure to Cyprus should not be under-stated,” Timothy Ash, head of emerging markets research at Standard Bank, wrote in a note to investors.
Kyiv Post editor Jakub Parusinski can be reached at [email protected]
