As Banks in Cyprus Falter, Other Tax Havens Step In

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 countries 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 spate 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.”

Article source: http://www.nytimes.com/2013/04/01/business/global/as-banks-in-cyprus-falter-other-tax-havens-step-in.html?partner=rss&emc=rss