SEPA – a common vision or a threat to the EU banks?

SEPA (Single Euro Payment Area) is an EU Council initiative for further economic integration of the EU for member states participating in the EU25, EEA (Norway, Iceland and Lichtenstein) and Switzerland. The concept is that citizens of the Euroland will have only one bank account and use that to pay any Euroland bills at the same fee non distinguishing between domestic or crossborder payment.

Also debit cardholders should be able to use any ATM or point of sale terminal at “reasonable” cost without differentiation on the country of card issuance.

The EU Council encourages use of SEPA in an effort to enhance collections while reducing cash and cheques payments. The initiative entails the interconnection of existing national ACH (Automated Clearing House). Currently about 7000 European banks and savings institutions use about 120 Clearing & Settlement infrastructures for low payment, high payment and debit cards that have no consistency in the instruments that these infrastructures support. SEPA will only develop basic standards and services; banks can develop value added services based on SEPA rules and regulations.

SEPA Action Plan (2004 -2010):

• SEPA was approved through the 2000 Lisbon Program. In 2002 the EPC (European Payments Council) was created to overlook the implementation of SEPA. In 2006, the Regulations for 2 SEPA systems (firstly, SEPA Credit Transfer Scheme & SEPA Direct Debits and secondly, debit/credit Cards Framework) were established. As of 1/1/2008 three SEPA financial instruments will be available, namely,
  • SEPA Credit Transfer Scheme (intended to be of unlimited in value).
  • SEPA Direct Debits (intended to be of unlimited in value).
  • SEPA Card Framework.
• By 1/1/2008 all banks need to ensure that will be reachable by any other bank participating in SEPA. Between 2008 and 2010 both National and SEPA payments could coexist.
• Due to SEPA, EU banks are now facing the threat of loosing a substantial income derived from the fees from money transfers within the EU. However, some other banks especially the hi-tech ones, are planning to capitalize on their technology by offering low cost products that will allow them to attract additional clients. Furthermore, all banks should realize that now the competition is moving from a domestic level to an EU market level in which case the increased competition will shrink fees to the minimum.

The daring banks wishing to exploit this opportunity can set up electronic automated banks at low tax jurisdiction (e.g. Cyprus) and capitalize on this opportunity. This can be done by attracting new customers that perform most of their banking electronically and by adopting competitive rates for the EU market.

Controlled Foreign Companies (CFC) rules may contradict the EC law

CFC rules generally provide that the income produced by controlled foreign companies which is subject to a lower tax rate in their country compared to the tax rate applicable to the resident shareholders, or which benefits from a favorable foreign tax treatment, will be allocated, as CFC income. The CFC rules generally apply to apportion a foreign company’s income to the parent company and to subject it to current taxation in the parent company’s country without reference to a dividend distribution. Some of the CFC rules within the EU include exemptions for EU entities, with the exception of the UK, Danish and German CFC rules which also apply to EU entities.

The Cadbury Schweppes case on the 12th of September 2006 by the European Court of Justice (ECJ) is bringing about changes to the CFC rules that EU countries apply.

In particular, 9 countries Germany, Denmark, Finland, UK, Italy, Sweden, Portugal, France and Spain will have to amend their CFC rules.

The broader scope of the above countries CFC rules (as in the case of the UK) does not conform to the ECJ decision, which provides that the national legislation is contrary to EC law as representing a restriction on freedom of establishment, except where it relates only to wholly artificial arrangements intended to escape the national tax normally payable. The Court also indicated that CFC legislation must not be applied where it is proved, on the basis of objective factors that are ascertainable by third parties, that, despite the existence of tax motives, the CFC is actually established in another EU Member State and carries on genuine economic activities there.

Denmark and Germany are among the first two EU countries to propose new tax legislation to conform to the ECJ's ruling.

A Foreign Company may redomicile to Cyprus

Under the Cyprus Company Law Cap 113 an amendment has occurred [with Law 124(I)/2006] which enables a foreign company to transfer its domiciliation (registered office, etc) to Cyprus and continue its corporate operations from Cyprus under the laws of the Republic of Cyprus.

Under this law and in conjunction with the competitive Tax advantages that Cyprus offers as the lowest EU Tax jurisdiction in Trading, Investing, Holding, and Restructuring, creates a step forward which will help to attract more corporations to Cyprus.

Under the Cyprus legislation an application to redomicile a foreign company in Cyprus the following requirements have to be fulfilled and submitted to the Registrar of Companies:

• The Memorandum of Association or equivalent constitutional document of the foreign company should provide for such possibility or redomiciliation;
• Resolution (or equivalent document) of the foreign company, authorising the Directors to redomicile the company in Cyprus;
• A copy of the revised constitutional document of the company satisfying the provisions of Cap 113 and which accords to the laws of the country of first incorporation;
• A certificate of good standing (or equivalent) from the country of first incorporation;
• An affidavit statement by a director of the foreign company, by its board of directors (or equivalent) stating
  • the name of the company and the name which it wishes to continue using with once the process of redomiciliation is completed;
  • the jurisdiction of first incorporation;
  • the date of incorporation;
  • the resolution (or equivalent) with which the company has decided to redomicile in Cyprus;
  • that the foreign company has formally declared its decision to redomicile in Cyprus to the authority of the country of the first incorporation (copy of which must be provided);
  • that there no criminal or administrative procedures pending against the company whether in the past or present;

Further the following documents will be required:

• An affidavit statement by a director, duly authorised resolution declaring the solvency of the company stating clearly that the persons signing do not know of any circumstances that would negatively and materially affect the solvency of the company within (12) months of the date of application;
• Certificate of company shareholders
• Any other document that may required by the Registrar to prove that
  • such application is allowed under the laws of the country first incorporation; and
  • that the parties needing to consent to such action under the law of the country of first incorporation have so consented;

The application for domiciled will be denied if:

• A procedure for dissolution or winding up or any other insolvency proceedings settlements or writs against the foreign company are in the process or equivalent proceeding have been commenced against the company;
• A liquidator, receiver or equivalent administrator has been appointed in relation to the foreign company;
• Any order exists that limits or suspend the rights of the company creditors;
• Any legal proceeding, criminal or civil have commenced against the foreign company in the jurisdiction of primary incorporation;

Once the documents mentioned all above have been submitted to the Registrar of Companies and the latter are satisfied according all the requirements then a temporary certificate of redomiciliation will be issued. The temporary certificate will give the redomicilied company status of a legal person under the Cyprus companies law and will extend t it all rights and obligations arising there from. The amended constitutional document will be deemed to be the Company's Articles of Association.

Within six (6) months from the issue of of the temporary certificate the foreign company must submit to the Registrar of Companies proof that the foreign company has deregistered otherwise the Registrar may

• strike out the company off the Registry and inform the jurisdiction of the foreign company that the company has not not been registered in Cyprus or
• may extend for another three (3) months the period in order submitting such proof of deregistration if there is a reasonable cause for such delay. After the last extension no further extensions are allowed be granted.

Financial accounts:

• The foreign company must prepare their financial statements in accordance with International Financial reporting standards (IFRSs) as adopted by the EU as if the company established since their incorporation in Cyprus.
• If the foreign has not previously prepare the financial statements in accordance with IFRSs, must apply IFRS 1 "First time adoption of International Financial Reporting Standards" for the preparation of the first financial statements in accordance with IFRSs.