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Cyprus deal with the European Union (EU) and the International Monetary Fund (IMF) bank bailout.

Part II - Cypriot Bank Bailout Taking Shape: Extremely Fluid Situation Bears Close Scrutiny

As summarized by EisnerAmper LLP on March 25, Cyprus has agreed to a deal with the European Union (EU) and the International Monetary Fund (IMF) to secure a 10bn euro bailout. With the agreement, Cyprus will adopt a significant restructuring of its banking sector, along with other measures such as limited tax increases and privatizations. The measures are designed to raise 5-6 billion euros to fund the bailout, and protect bank customers with deposits of 100,000 euros or less. The measures cannot be voted down by Cyprus's parliament.

Under the agreement, Cyprus's second largest bank - Laiki Bank - will be closed down and deposits above 100,000 euros moved into a new "bad bank". Deposits below 100,000 euros will be moved into Bank of Cyprus, the country's biggest bank, which is being significantly restructured. Deposits at Bank of Cyprus of more than 100,000 euros are being frozen.

For all deposit in excess of 100,000 euros, the government will determine how much of a haircut on the deposits will be applied, which could result in a 30%-50% loss by depositor’s in Bank of Cyprus. Depositors in the Bank of Cyprus with amounts above 100,000 euros will be given Bank of Cyprus shares in exchange of the loss suffered.

Compared to the one-time bank levy on deposits as cited in the EU-IMF deal last week, there is no levy in the new deal, however the bank restructuring measures means deposits over 100,000 euros will effectively be used to pay the bulk of the 5.8bn-euro bill, which will then be applied against the total bailout cost of 10bn euros.

Although the haircut has been referred to as a tax, it will not likely be considered a creditable income tax for U.S. tax purposes. And, as part of the agreement Cyprus also intends to increase the corporate rate from 10% to 12.5%.

At this time there remains uncertainty as to additional tax changes that the agreement will necessitate, although private investors with accounts in Cyprus certainly are closely reviewing the current and long term financial climate, as are corporate entities doing business and or domiciled in Cyprus.

We will continue to monitor the situation in Cyprus and the Eurozone and provide observations as appropriate. Investors need to continue to exercise caution with investments in, and with exposure to, the Eurozone and review their asset allocation model and compare to their investment policy statement and risk tolerance and include additional considerations.

This Outline is not intended to be a comprehensive analysis of the Cyprus bailout plan agreement (“the agreement”), but is a summary of the agreement’s more significant provisions as presently known. We advise you to contact your tax and investment and financial planning advisors to discuss how specific provisions of the agreement will impact your tax, investment, business, and financial planning objectives and fact pattern. The information in this Outline should not be relied upon as, nor intended to provide, investment or tax or economic advice. This Outline also does not provide investment or tax or other advisory services. EisnerAmper LLP is a certified public accounting firm and is an independent member of PKF International Limited.

CLICK HERE FOR PART 1: Cypriot Bank Bailout Taking Shape: Extremely Fluid Situation Bears Close Scrutiny 

 

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Shawn Carson is an International Tax Services Group Director experienced with international structuring, restructuring, financing and M&A work, as well structuring for U.S. companies investing overseas and foreign companies investing into the U.S.

Richard Sackin is a Senior Tax Partner with over 30 years of experience in the fields of accounting and taxation. He has many years of experience handling tax structuring and due diligence for mergers and acquisitions of U.S. corporations and for foreign corporations.