After Cyprus’ parliament rejected the bank account tax in the country demanded in return for an EU/International Monetary Fund (IMF) bailout, the next steps for the tiny island state are now uncertain. An amendment to the proposal was made exempting deposits of less than EUR 20,000, after original plans would have imposed a tax on all holdings in Cypriot banks. However, despite the change, the Cypriot parliament overwhelmingly rejected the proposal, with 36 MPs voting against, 19 abstaining and none in favor of the plan.
The government in Cyprus is currently in discussions to find a solution to the problem and among the ideas appearing in the media is support from Russia. President Anastasiades convened talks with party leaders and the country’s central bank governor and later meetings with representatives of the EU, European Central Bank (ECB) and the IMF are planned.
Low taxes in Cyprus have attracted foreign money to its banking system, with between a third and a half of all deposits held by Russians, according to the BBC. Around 40,000 Romanians who live in Cyprus and possibly local businesses which chose to incorporate in Cyprus would have been affected by the the plan to tax bank deposits. The original plan would have applied a 6.75 percent tax on all deposits of less than EUR 100,000 and a 9.9 percent levy on holdings over EUR 100,000.
Romanian bank Banca Transilvania, which has subsidiaries in Cyprus, told clients that transfers from the bank’s accounts in Cyprus to other countries, including to Banca Transilvania in Romania, are temporarily suspended. It is as yet unclear if the move will affect deposit holders in subsidiaries of foreign banks, as so far only subsidiaries of Greek banks were exempt from this tax. The offshore industry will most likely be affected, and Romania has around 5,100 offshore companies registered in Cyprus.
Markets remain jittery as the uncertainty in Cyprus continues and there is a good deal of fear that the proposed tax could set a precedent for other future bailouts. Meanwhile, the banks in Cyprus are still closed.