Skip to main content

Author: Prospectacy Business Services Team

This information box about the author only appears if the author has biographical information. Otherwise there is not author box shown. Follow YOOtheme on Twitter or read the blog.

Russians Return to Cyprus, a Favorite Tax Haven


NICOSIA, Cyprus — When the Cypriot government forced bank depositors — many of them Russian — to pay their share of an international bailout last spring, Vasilis Zertalis’s phone started ringing.

The companies his consultancy helps incorporate on this breezy Mediterranean island — many of them Russian, too — wanted to know how quickly they should get out.

These days, the calls are coming for another reason: Businesses are eager to get in.

“We are registering twice as many companies than when after the crisis hit,” Mr. Zertalis, the head of a big registrar, Prospectacy Limited, said as the sun set over palm trees near his office one recent weekday. “Russians, Germans, Latin Americans, Canadians — they’re all coming,” he said.

Especially the Russians. And that is even though they were the category of foreign investors that the Cypriot government and its international bailout creditors seemed to single out for punishment last spring, when officials tried to turn the economy here into something more than an offshore tax haven whose banks looked the other way as money of questionable provenance rolled in from abroad.

The banking system has been drastically overhauled. But the tax haven part less so.

“People are still interested because the legal and tax system remains much more stable than in Russia, and they think that the threat of another haircut is remote,” said Costas Erotocritou, the vice president of the Russian Business Association here, and a lawyer whose firm specializes in setting up offshore accounts.

The haircut he referred to was the Cypriot government’s move last spring to seize vast sums, much of it deposits from wealthy Russians, at the nation’s biggest banks. (Because part of the money seized was converted into bank shares, one other anomaly of the bailout was that it turned wealthy Russians into some of the biggest shareholders in Cypriot banks.)

A year after the bailout, Cyprus’s economy is still in deep trouble and its banking sector is half its former size. With bank tellers, construction workers and retail employees caught in the fallout, unemployment has jumped to 17.5 percent from 14 percent a year earlier; youth unemployment is above 40 percent.

Banks sharply curbed lending as the level of deposits shrank, and nearly half their outstanding loans are in arrears or default. Private debt has surged to around 300 percent of Cyprus’s 17 billion euro economy.

But the one rebounding business is foreign incorporation. Cyprus is once again a favorite tax haven, even after international bailout officials forced the government to nudge the corporate tax rate up to 12.5 percent, from 10 percent. That is still the lowest in the euro zone, on par with Ireland and well below Germany’s 29.5 percent and France’s 33.3 percent.

The registration of what are mostly shell companies created to shelter income was 1,454 in January alone. That is more than double the nadir of last spring, after the bailout, and even slightly more than were registered in December 2012, before the collapse.

As a result, there are now about 273,000 companies on Cyprus’s corporate registry, a staggering figure in a country whose population is only 839,000. “This is not an industry that has died,” said Yiorgos Lakkotrypis, Cyprus’s commerce and energy minister.

And the Russians have dug in.

“The Russians won’t leave because they really don’t have any other option,” Mr. Zertalis said. “Sure they lost money in the haircut, but when it comes to business they will continue to use the island because returning to Russia is not a better solution for them.”

But there is one place where neither the Russians nor any other foreign investors are putting much money: Cypriot banks.

After deposits were seized, “companies generally won’t hold more than 100,000 euros in a Cypriot bank now,” said Mr. Erotocritou.

He was referring to the radical move by officials who, for the first time in a euro zone bailout, forced some depositors to take a loss. The authorities last spring liquidated Laiki Bank, Cyprus’s second-biggest financial institution, and folded its remains into the largest one, Bank of Cyprus, where the government then confiscated 60 percent of deposits above €100,000 to recapitalize the lender.

Total deposits in Cypriot banks, which were €57 billion last April, dropped to €47 billion by November. They might have fallen further and faster if the government had not tightly controlled withdrawals and foreign transfers at the height of the crisis.

By now those controls have been relaxed to the extent that they hardly affect business operations anymore, enabling companies that are still comfortable keeping their money in a Cypriot bank account to conduct transactions more easily than they did six months ago.

Some controls remain in place for individual accounts, including a €300 daily withdrawal limit and central bank vetting of large cash transfers. But last week the finance ministry said further loosening of the rules was in the offing. That was in response to a review by the International Monetary Fund, which found that Cyprus was fulfilling the fiscal promises it made as part of the bailout.

Even so, many businesses are taking no chances. They are setting up bank accounts entirely outside of the euro zone on the concern that, as in Cyprus, their assets could be seized to pay for banking crises that might blow open in other European countries, Mr. Zertalis, the consultant, said.

“No matter what European leaders say now, all of our clients are saying, ‘Let’s split our accounts among as many different countries and banks as we can,’ ” Mr. Zertalis said. “They say ‘We won’t keep our money in Cyprus, but we don’t feel secure about Europe anymore, either.’ ” He said many had turned to financial institutions in Canada, Switzerland and Asian countries.

Yet while financial agents like Mr. Zertalis are enjoying a bounce-back — he doubled the size of his small staff in the last six months and plans to double it again this year — many other people across the island are casualties of the banking collapse.

Thousands of small and midsize businesses have been hobbled by the dearth of bank lending, said George Pamboridis, a senior partner at the law firm Pamboridis.

On Nicosia’s main shopping street, storefronts once adorned with mannequins, shoes and electronics now sit empty. In Nicosia’s main square, retail space formerly occupied by a Laiki Bank branch is vacant, with debris strewn where teller windows once stood.

Outside Nicosia, at a hulking warehouse near green meadows and olive trees, volunteers at the Alkyonides charity rushed on a recent weekday to prepare for the 50 families who had trekked there to receive handouts of food, diapers and used clothing.

Two years ago, the charity typically served around 15 families a month. Today, it is overwhelmed with as many as 1,000 families in need, mostly people who used to work in banking, construction, or retailing, said Koulla Demetriou, a volunteer.

“Many people can’t find jobs, and every month it gets worse,” Ms. Demetriou said, as she typed up a food ticket for Angeliki, 42, a mother of three who recently lost her job working in security for a bank.

“The main hope now is that the people of Cyprus will care for each other.”

In the meantime, the gap between Cypriots out of luck and foreigners with money — especially the Russians — has never been starker.

“Rich Russians love this country,” Mr. Erotocritou said. “They will keep coming back.”

published by The New York Times

read article

Continue reading

As Banks in Cyprus Falter, Other Tax Havens Step In


Vasilis Zertalis – CEO of Prospectacy LTD

LIMASSOL, Cyprus — Bloodied by a harsh bailout deal that drives a stake through the heart of this Mediterranean country’s oversize financial industry, Cyprus now faces a further blow to its role as an offshore tax haven: the vultures from competing territories are circling.

With a flood of e-mails and phone calls in recent days to lawyers and accountants here who make a living from helping wealthy Russians and others avoid taxes, competitors in alternative financial centers across Europe and beyond are promoting their own skills at keeping money hidden and safe.

“We are aware of the economic problems facing Cyprus at the moment,” read one such message from a law firm in Malta, also a euro zone member. “We would like to propose an avenue of action for your consideration: offering corporate relocation to Malta,” continued the business pitch, trumpeting Malta’s low taxes and “flexible yet robust regime” for financial services.

Similar unsolicited offers have originated in well-known havens like Switzerland, Luxembourg and the Cayman Islands, as well as in a host of other locations, including Dubai and Singapore. Even the northern part of Cyprus, controlled by Turkish Cypriots, has joined the feeding frenzy, promoting its own banks as a stable alternative to those run by Greek Cypriots in the crisis-racked southern part of the divided island.

Particularly successful at luring Russians, Cyprus has built up a large infrastructure of lawyers, accountants and other professionals schooled in the arts of tax avoidance. Its corporate registry now has 320,000 registered companies, a staggering number for a country with only 860,000 people. Most are shells set up for foreign companies and wealthy individuals seeking to avoid taxes.

“We have been thrown to the wolves, and now the wolves have responded,” said Nicholas Papadopoulos, head of the financial and budgetary affairs committee in Parliament.

Bitterly critical of last week’s bailout deal — which is forcing Cyprus to shrink its banking and financial industry drastically and stick the largest bank depositors with much of the bill — Mr. Papadopoulos said the European Union was “punishing a whole country just to hit Russians.”

Even if new controls in Cyprus make it impossible to move much capital elsewhere for the moment, rival havens are nonetheless intent on luring foreign-owned businesses that have been incorporated in Cyprus and might be happy to relocate.

Mounting a counteroffensive is the Cyprus Fiduciary Association, an industry lobbying group.

“The banking sector is finished, but the service industry can survive,” said the group’s secretary, Andreas Marangos, a Limassol lawyer. Russians who now use Cyprus will open bank accounts elsewhere but might stick around for other offshore services, he said.

The rush by rival havens could pose economic troubles as Cyprus struggles to keep afloat a financial industry that employs tens of thousands of people. Cypriot unemployment, already at 15 percent, is expected to soar as the finance sector and the overall economy contract, aggravating a crisis that the bailout was intended to solve. Along with shipping, the financial industry is especially crucial here in Limassol, a port city popular with wealthy Russians looking for sun and a safe place to put their money.

Cyprus, although only a relatively small player in a global network of low-tax financial centers, has made serving tax-averse foreigners a central pillar of its economy. A small sunny island whose main economic engine used to be potato farming, Cyprus shifted to a finance-centered model after Turkish troops took control of the northern part of the island in 1974.

While Cyprus and its rivals dislike being described as “tax havens” and prefer to be known as “offshore financial centers,” those now picking at Cyprus’ carcass trumpet their ability to keep money beyond the reach of tax authorities. A Swiss company, the Gonthier Group, last week sent e-mails to Cyprus firms working with foreigners, suggesting they offer their clients a Swiss alternative, namely an investment “vehicle which is extremely low-profile, not classified as a bank account or trust and thus very much under the radar of national fiscal authorities.”

Tilly Schneeberger Gonthier, a principal of the Montreux-based company, said on Sunday by telephone that her pitch was “absolutely not” an invitation to evade taxes, but merely an offer of a secure alternative to Cyprus-based investment vehicles. She denied wanting to hurt the Cypriot financial services industry.

“We are trying to help them,” Ms. Gonthier said. “They have a lot of unhappy clients.”

She said that nobody in Cyprus had yet taken up her offer, but added: “This doesn’t happen very fast. It takes time.”

Mr. Papadopoulos, the parliamentary finance committee head, said he did not begrudge competitors in other locations trying to lure away clients rattled by his own country’s troubles. “This is a zero-sum game,” he said.

Echoing a widespread view here, he complained that Cyprus had been unfairly singled out as a haven for shady money by the European Union even as others, including fellow members of the 27-nation bloc, provide much the same services.

“We have made mistakes, but the whole point of seeking help from the European Union was to get fair treatment,” he said, referring to Cyprus’s request for a 10 billion euro lifeline from its European partners and the International Monetary Fund.

A central demand of a bailout package announced early last Monday in Brussels, the headquarters of the union’s bureaucratic apparatus, is that Cyprus dismantle its finance-dominated economic model.

Cypriot banks gorged for years on deposits from overseas, especially Russia, and spewed out loans at such a rate that the banking sector ended up dwarfing the rest of the economy. Its total assets — now mostly loans of uncertain worth — grew to be eight times larger than the whole country’s economic output.

But this imbalance is no worse than that in Malta, where the banking sector is also about eight times gross domestic product. And it is far less severe than in Luxembourg, where banking assets are more than 22 times G.D.P. Both Malta and Luxembourg, each a member of the European Union, last week loudly insisted they were very different from Cyprus — while their own financial service providers rushed to court Cyprus’s clients.

How much success those countries have had at getting Russians and others to decamp is still unclear, although many lawyers here acknowledge that they have already helped a number of foreign clients open new bank accounts outside Cyprus. The country’s own banks, closed for nearly two weeks to prevent depositors from withdrawing all their cash, reopened last week but are now caught up in a web of capital controls that make most normal transactions all but impossible.

Vasilis Zertalis, the chief executive of Prospectacy, a Nicosia corporate services company, said he understood that foreigners with companies and investment vehicles registered in Cyprus now needed to find banks elsewhere. But he is outraged by the efforts of rival centers to profit from Cyprus’s pain.

“When somebody is down, you should not try to push them further and give them a final blow,” said Mr. Zertalis. “I believe in capitalism, but there should be certain ethics.”

As authorities last week unveiled plans to shut down Cyprus’s second biggest bank, Laiki, and worked out a strategy to preserve the Bank of Cyprus, the country’s biggest, by effectively confiscating 60 percent or more of deposits over 100,000 euros, a financial services company in the Cayman Islands made a transparent grab for business.

“Given the inherent pressure banks will be placed under in Cyprus, your firm may see a need to consider other jurisdictions when consulting clients,” Bateman Financial said in an e-mail to Mr. Zertalis and other Cypriots in the same line of work. “The Cayman Islands can offer the stability that is currently desired.”

published by The New York Times

read article

Continue reading