Is Cyprus Labeled as a Tax Haven Country?
In the late 1980s, Cyprus positioned itself as a tax haven, attracting Russian oligarchs, Eastern European civilians, and companies with its permissive financial services environment [1]. However, a series of events over the past few decades have led to a significant shift in the island nation's financial landscape.
By 2010, the banking industry in Cyprus had grown to become nine times larger than the country's economy, a testament to its popularity as a tax haven [2]. The low flat corporate tax rate, strict privacy laws, and geographic desirability due to its proximity to Europe and Russia contributed to its allure.
However, the sovereign debt crisis in Greece rapidly escalated the number of nonperforming loans held by Cypriot banks by 2012, and the fall of the Cypriot banking system was partly due to the country's overreliance on its banking sector [1]. By March 2013, the Cypriot banking system was in dire need of a bailout.
The government of Cyprus, in response to the financial crisis in the banking sector, implemented a bailout program in 2013 [1]. The program involved unprecedented terms, including the imposition of losses on depositors at two of the largest banks in the country [2]. The European Central Bank and the International Monetary Fund played a significant role in the implementation of the bailout program in Cyprus.
One of the conditions of the bailout was the country's agreement to change its banking practices to end its status as an offshore tax haven [1]. In compliance with this condition, Cyprus initiated participation in the Automatic Exchange of Financial Account Information in Tax Matters, marking the end of its status as a tax haven [1][2].
Countries participating in the Automatic Exchange of Financial Account Information program automatically send tax-related banking information of noncitizen account holders to tax authorities in their countries of citizenship [2]. With this information, local tax authorities can compare the information on tax returns to determine if offshore income has been reported.
The reform was largely triggered by international investigations such as the ICIJ’s Cyprus Confidential leak, which exposed the country’s financial sector facilitating asset shielding by powerful oligarchs amid the 2022 invasion of Ukraine and subsequent sanctions [3]. These revelations created reputational damage and spurred legislative action by Cyprus’s parliament to comply with EU requirements and international standards [3]. Cyprus also faced challenges in recovering unpaid taxes from offshore activities linked to oligarchs, highlighting weaknesses in the previous regime that tax reforms sought to address [4].
To further strengthen financial transparency, Cyprus established a dedicated sanctions implementation unit with enhanced powers to investigate sanctions evasion, enforce EU and UN sanctions, track and freeze assets, and provide guidance to economic operators [3]. These changes mark a significant shift from Cyprus's earlier permissive financial services environment.
In addition, Cyprus hiked its corporate tax rate to 12.5%, among the lowest corporate rates for non-offshore entities in the world [2]. The Organization for Economic Cooperation and Development (OECD) declared Cyprus, Luxembourg, and Seychelles to be largely compliant with standards set forth by the Global Forum on Transparency and Exchange of Information for Tax Purposes [3].
In summary, Cyprus ended its offshore tax haven status by adopting stricter enforcement mechanisms on financial activities, particularly relating to sanctions, improving transparency, and closing fiscal loopholes in line with broader EU initiatives to combat tax evasion and money laundering [3][4].
References: 1. The Guardian 2. Investopedia 3. Transparency International 4. OECD
- The shift from Cyprus's earlier permissive financial services environment led to the implementation of stricter measures, such as participating in the Automatic Exchange of Financial Account Information, which aims to end its status as an offshore tax haven.
- To ensure financial transparency, Cyprus established a dedicated unit to investigate sanctions evasion, enforce sanctions, track and freeze assets, and provide guidance to economic operators, moving away from its past reputation as a tax haven.
