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Cyprus and Troika Finally Agree on Bailout
Restructuring of Laiki Bank: a 'Good Laiki' and a 'Bad Laiki'
The 'Good Laiki' will be merged with the Bank of Cyprus. Accounts in Laiki that have up to EUR100,000 will be transferred to the 'Good Laiki'. For the accounts that have more than EUR100,000, the amount up to EUR100,000 will be transferred to the 'Good Laiki' and around 50% of the funds will stay in the 'Bad Laiki' so that the debts of the bank can be paid. This means creating a "good" bank holding safe loans and deposits covered by the EU's EUR100,000 guarantee threshold, and a "bad" bank holding bad debts and, crucially, those deposits placed in the 2 main lenders worth more than EUR100,000. Money channeled into this "bad" bank could be tied up for a period of maximum 3 years.
Bank of Cyprus will have full contribution of shareholders, bond holders and of creditors
This means that the shareholders, bondholders and creditors that will be transferred from Laiki Bank to the 'Good Laiki' will be under the control of Bank of Cyprus. The Bank of Cyprus will be recapitalised up to 9% capital ratio and only the uninsured deposits or balances over EUR100,000 will take part in recapitalisation, as well as the contributions of shareholders and bond holders.
Besides the above, Eurogroup wants Cyprus to implement the below measures:
- Increase of corporate tax from 10% to 12.5%
- Increase of the withholding tax on capital income
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Even if the above law passes and the corporate tax in Cyprus increases from 10% to 12.5% Cyprus will still have one of the lowest corporate tax rates in the EU. The new corporate tax is not expected to significantly affect the use of Cyprus in tax structures, since Cyprus will remain an attractive jurisdiction. This is partly due to their extensive double tax treaties, the application of the EU Parent-Subsidiary Directive, zero witholding tax on dividends and no captial gains tax on the disposal of shares.