ECB concerned over Cypriot bank profit tax proposal

In 2023, Cypriot banks reported unprecedented profits, marking a 15-year high, with projections suggesting even greater earnings in 2024. This financial windfall has sparked a contentious debate within the House of Representatives regarding the imposition of extra taxes on banks. AKEL, in particular, has proposed legislation to establish a Solidarity Fund aimed at supporting borrowers and addressing social challenges exacerbated by rising inflation. Central to AKEL's proposal is the taxation of banks' windfall profits, largely attributed to the European Central Bank's (ECB) persistent interest rate hikes.

The Ministry of Finance, along with the Central Bank of Cyprus and banking institutions, opposes the proposed legislation, arguing it could destabilize the financial system. AKEL's initiative seeks to mitigate the social impact of inflation without jeopardizing financial stability, emphasizing the necessity of addressing soaring profitability among banks, which has surged by 97% compared to 2022.

In response, banks have vehemently opposed the proposed tax, asserting that Cyprus already imposes higher banking taxes than many other Eurozone countries. They cite a longstanding additional tax on deposits imposed since 2011, originally intended for a temporary two-year period but continuously renewed, irrespective of banks' profitability. Over the past seven years (2017-2023), banks have paid over €854 million in income tax, special taxes, and VAT, with an additional €395 million in special taxes on deposits during the same period.

Furthermore, banks caution that additional taxation could deter foreign investment crucial for economic growth. They argue that profitability is essential for maintaining banking sector solvency and attracting international investors. The European Central Bank has also expressed reservations, highlighting the pivotal role of bank profitability in financial stability across the Eurozone.

Critics within the banking sector stress that recent profitability stems from deliberate management strategies rather than unexpected windfalls. They contend that ongoing fiscal uncertainties in Cyprus, including fluctuating tax policies and regulatory instability, undermine the country's appeal as a secure investment destination. Panicos Nicolaou, outgoing president of the Association of Banks and CEO of Bank of Cyprus, has warned against taxing bank profits excessively, suggesting it could tarnish Cyprus' reputation among foreign investors.

Under AKEL's proposal, a 5% exceptional solidarity fee on credit institutions would be levied for fiscal years 2024 and 2025, based on the increase in net interest income compared to 2022. Funds collected would finance the Solidarity Fund's operational expenses and designated projects, supplemented by state sponsorship, donations, and interest on investments.

As the legislative process unfolds, Cyprus faces critical decisions balancing economic stimulus with financial stability, amid divergent views on the implications of taxing banks' unprecedented profits.

[Summary of Panayiotis Rougalas' original story in Greek published in Kathimerini's Cyprus edition]