The economic situation of Cyprus has lately been the subject of heated debates. Financial help from the EU and the International Monetary Fund worth €10 billion will probably save the country from bankruptcy, but it will be also necessary to introduce capital control measures. As many SPVs have been created in Cyprus, as well as companies whose purpose is to buy and manage real estate situated in East Europe, it is important to analyse the impact of the country's crisis on the real estate market. Such analysis has recently been made by Colliers International, which published the report “The Cyprus Debate”. The results show a growing support for many European countries' efforts to introduce greater transparency, thanks to which countries could increase domestic tax revenues by taxing at source.
According to Colliers experts, East-Central Europe has not been significantly affected by the events in Cyprus. The report informs that the impact on the operational capacity of Cypriot SPVs is slight. There is also no evidence of owners shifting the location of their SPVs.
The report also shows that self-repair programs begin to replace the rescue programs. As wealthy countries are themselves trying to keep financial equilibrium, there is not tolerance for those which do not take up such this fight. Mario Draghi from ECB and Jeroen Dijsselbloem, the chairman of the bloc's 17 finance ministers, have plainly presented their view on countries with overgrown banking sectors – they should put their economy in order or they will not receive any help in case of any troubles.
Analysts underscore the fact that tax havens and people who do not pay any taxes will also begin to feel the pressure. This issue concerns especially the countries where the volume of banking deposits is excessively high in relation to the country's economy, i.e. Cyprus, Luxembourg or Malta. These countries will have to resign themselves to closer scrutiny, which in a long-term perspective might make them less attractive as locations for investment vehicles. This situation stems from the pressure which certain European countries exert on the EU, demanding greater transparency, easing banking secrecy rules and facilitating cooperation with foreign tax authorities.
Another conclusion embedded in the report is that bilateral agreements with tax havens will undergo certain changes in the future. Such changes have already been introduced in Russia and Poland, transforming bilateral agreements with Cyprus concerning the avoidance of double taxation in relation to foreign companies.
Given the large number of Eastern European assets held in SPVs in both Cyprus and Luxembourg, the message for real estate investment markets is straightforward. No matter where or how an asset is held, ensuring that deals are being priced to account for the impact of tax – particularly capital gains tax – is paramount when conducting transactions. Whilst accounting for latent capital gains tax has become more commonplace in recent years, the chances are that whether a deal is priced at a yield of 6.5% or 8%, there could be an increasingly wide variation in returns around that number, as a result of the deal structure/domicile involved. - concludes the author of the report, Damian Harrington, Regional Director – Research & Consulting CEE Investment Services at Colliers International.
Below you will find a fill version of the report in a PDF file.