Cyprus looks to have avoided collapse thanks to a €10 billion bailout deal hammered out with the European Union and the International Monetary Fund, but not without the introduction of capital controls. The impact on CEE real estate, however, remains unclear, especially given the large number of special purpose vehicles (SPVs) and companies established in Cyprus to hold and manage real estate located in Eastern Europe
Colliers International’s The Cyprus Debate, published today, attempts to examine the wider ramifications of the Cypriot drama on real estate and Eastern European investment markets. Findings from the report suggest that momentum is building behind European governments push for greater transparency, in order to target increasing revenues through taxing at source. And tax haven domiciles are in the firing line.
Key findings include:
CEE has emerged relatively unscathed from the events in Cyprus. Reduced Cypriot bank lending capacity due to the nationalisation of Bank of Cyprus and the closure of Laiki Bank has had little direct impact on markets in Eastern Europe. Neither has there been much impact on the operational capacity of Cypriot SPVs. So far there is limited evidence of owners shifting their SPVs and operations to alternative domiciles.
A bail-in model is replacing the bail-out version. The era of private profits and socialized losses is over. As wealthy nations struggle to maintain their own fiscal health there is no longer any tolerance of, nor pity towards, nations who think they can have their cake and eat it. The ECB's Mario Draghi and top Eurozone finance minister Jeroen Dijsselbloem, have both sent stern messages to countries with outsized banking sectors: Sort yourselves out as there may be no help if you get into trouble.
Tax havens and tax evaders will feel the squeeze. Luxembourg is not Cyprus is not Malta but in each country the volume of banking deposits to the size of its economy is excessively high. The EU is coming under increasing pressure from certain member states and populations to ease banking secrecy rules, improve bilateral cooperation between tax authorities, and cast light into shady tax havens. Luxembourg and other locations will have to resign themselves to increased scrutiny, which could impact their longer-term suitability as domiciles for investment vehicles.
Expect more amendments of bilateral tax treaties with offshore domiciles. Russia and Poland have already amended their bilateral Double Tax Treaties with Cyprus with respect to tax treatment of ‘offshore vehicles’.
Looking forward, Damian Harrington concludes: “Given the large number of Eastern European assets held in SPVs in both Cyprus and Luxembourg, the message for real estate investment markets is quite straightforward. No matter where or how an asset is held, ensuring that deals are being priced to account for the impact of tax is paramount when conducting transactions. 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.”