International lenders would like Cyprus to raise its corporate tax and introduce a levy on capital gains and a financial transaction tax to ensure it can repay a euro zone bailout it asked for last year, euro zone officials said.
Cyprus needs up to 17 billion euros (14.8 billion pounds) – almost as much as its annual gross domestic product – in emergency loans, mostly to recapitalise its oversized banking sector, hit by a Greek debt restructuring, but also to service debt and government expenses.
The amount is small compared to euro zone GDP, but policy-makers in several countries, notably Germany which faces elections in September, are keen to limit taxpayer exposure after earlier bailouts for Greece, Ireland, Portugal and Spain made public opinion reluctant to further aid.
One official, briefed on the talks between the International Monetary Fund, the European Central Bank and the European Commission – known as the Troika – and the new government in Nicosia, said no decisions had yet been taken on any of the taxes.
“All these options are on the table now, but there is no agreement yet,” the official said.
The capital gains tax could be introduced only temporarily, for three years, and provide the government with an extra revenue of 200-300 million euros.
The nominal corporate tax, which now stands at 10 percent, could be raised to 12.5 percent, officials said.
The introduction of the financial transaction tax, which will be applied by 11 euro zone countries from next year, is a Troika idea, which Cyprus does not support for now. The tax would be set at 0.01 percent of the value of trades for derivatives and 0.1 percent for stocks and bonds.
In what could be a welcome relief for euro zone taxpayers suffering bailout fatigue, officials said Cyprus received signals from Russia, which has strong business ties with Nicosia, that Moscow could consider contributing to the bailout if it got the same credit status as euro zone lenders – meaning it would get repaid right after the IMF.
“It is likely to happen,” one official familiar with the bailout talks said.
Officials also said that Russian investors were interested in buying a majority stake in Cyprus Popular Bank and increasing their holdings in Bank of Cyprus – the two biggest banks on the Mediterranean island.
Cypriot President Nicos Anastasiades is to travel to Russia to meet President Vladimir Putin in the coming weeks to discuss possible Russian help, officials said. He will seek a 5-year extension of an existing Russian loan to Cyprus of 2.5 billion euros that matures in 2016 as well as a reduction in the 4.5 percent rate of interest.
Officials said Cyprus had asked for a reduction of the interest by 1.5-2.0 points.
Euro zone finance ministers pledged this week to agree a bailout for Cyprus by the end of March, but details of how the rescue will be financed are yet to be sorted out.
German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British business people, to help pay for the cost of the rescue, a process known as a “bail-in”.
There are concerns in Berlin that Cyprus, with its low corporate tax rate and liquid banking system, has become a conduit for money-laundering. Russian individuals and companies have a high level of deposits in the banking sector.
But Cyprus fears any “bail-in” will spark the rapid withdrawal of funds from the island and undermine its entire business model, making the economic situation even worse.
Figures released last week showed a little over 2 percent of total deposits was withdrawn in January, although officials say there has since been a return of capital. (Reuters)

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