Part III - As Cypriot Bank Bailout Evolves, Tax Planning Remains Uncertain

Banks in Cyprus reopened yesterday after two weeks and under tight security. However, as summarized by EisnerAmper LLP on March 25 and March 27, there remains continued uncertainty as to additional tax changes that the agreement will necessitate.

Cyprus has been a huge concern to EU members because of its lax banking laws and low tax rates. Considerations for a Cypriot company could include redomiciling to a jurisdiction such as The Netherlands, since The Netherlands as well as Cyprus have favorable redomiciliaton legislation.

Separately, Cyprus’s money transfer controls may slow deposit withdrawals by businesses and investors; however, the threats of taxes, levies and now the conversion of large deposits into Bank of Cyprus equity will cause foreign money to very likely go elsewhere, resulting in a significant shrinkage of the economy. Countries from Argentina to Iceland have used similar measures in the past to defend against the devaluation of their own currency; however, as a member of the Eurozone, it will be harder for Cyprus to enforce money transfer controls since any money that leaves the Cypriot banking system can be withdrawn without losing value.

European Commission Vice President Olli Rehn, through a spokesperson, noted that the cases of Cyprus and Greece do not have common points, therefore striving to assure that there would not be a similar decision for Greece as there was for Cyprus. This comment helps to calm Eurozone countries over concerns related to the comments on March 25 by Eurogroup President Jeroen Dijsselbloem stating the decision on Cyprus could become a model for other Eurozone countries. Rehn’s comments cited that the Greek crisis, unlike the Cypriot one, did not begin in the banking sector, which in Greece is much smaller and only twice the size of the country`s GDP compared to the case of Cyprus where the banking sector is eight times its GDP.  Rehn’s comments also cited Greece’s significantly improved supervision of its banks, and more secure and careful administration.

EisnerAmper LLP continues to monitor the situation in Cyprus and the Eurozone and will provide observations as appropriate, including comments from the European Commission, the Government of Cyprus, PKF Cyprus (an independent member of PKF International Limited) and global financial news organizations. Investors need to continue to exercise caution with investments in and exposure to the Eurozone and review their asset allocation model, investment policy statement, and risk tolerance.

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.

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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 Tax Partner with over 30 years of experience in the fields of accounting and taxation handling tax structuring and due diligence for mergers and acquisitions of U.S. corporations and for foreign corporations.