Cyprus’s banks are digging in against a proposed windfall tax as parliament prepares for a heated debate over AKEL’s bill to impose an emergency solidarity levy on credit institutions for 2025 and 2026.
The left-wing party’s proposal aims to ensure fair distribution of burdens arising from cumulative inflation and interest rate rises over the past three years. The issue carries extra weight with parliamentary elections scheduled for May.
AKEL first proposed taxing bank windfall profits in 2023, but the bill failed amid political and institutional opposition. Critics argued it was unconstitutional, would harm bank capital, damage Cyprus’s image as an investment destination and ultimately cost borrowers.
The debate reignited after Phileleftheros published a European Commission study titled “Taxing the windfall profits of banks: Lessons from the Baltic countries”, which showed similar measures were implemented in other EU member states without affecting financial stability.
The Banking Association said it opposes the proposal, though it stopped short of a detailed response ahead of parliamentary debate. The association said it needs to see when and if the bill will be discussed, what form it will take and how other parties respond.
The association argued the proposal targets only the banking sector, whilst many other sectors have seen revenues and profits from extraordinary circumstances over the past five years.
It cited healthcare companies during the pandemic, energy firms during price spikes, service businesses benefiting from corporate inflows due to conflicts in Ukraine and Gaza, and retailers during inflationary price increases.
The association stressed that Cyprus already imposes a special tax on banks that exists nowhere else. The levy is imposed on deposits regardless of whether banks are profitable, whether interest rates are high or low, or whether they have increased revenues from other sources.
The levy is paid directly to the state by banks and rises as deposits grow, which they have done every year in recent years. Banks have paid more than €500 million over the past decade, the association said.
The association noted that the Commission study cited by AKEL does not constitute a recommendation to member states but rather documents cases in Estonia, Latvia and Lithuania. The study confirms these windfall taxes did not cause problems for local financial systems.
However, the association said Estonia agreed to a voluntary programme for larger dividend distributions to shareholders rather than retaining profits in banks. Latvia and Lithuania imposed additional emergency taxes for one or two years of around €100 million annually.
Cyprus’s special levy already stands at approximately €70 million per year with no prospect of reduction or removal as banks would like, the association said.
The association argued the proposal lacks substantive grounds, as monetary policy has eased and interest rates and inflation have substantially declined. The government is discussing tax reform, and banking taxes are being considered alongside other issues.
The economy and banks are receiving positive assessments, unemployment has fallen significantly, growth is robust, loans and deposits are rising and non-performing loans have been greatly reduced, the association said.
An additional, third tax on the banking sector would deal a blow to the positive trajectory, credibility and consistency Cyprus has shown in recent years, it concluded.