Exemptions of the interest rate ceiling introduced on loans granted by no financial institutions

In our November newsletter reference was made to an amendment of the Criminal Code which made it an offence to provide loans with an interest rate which exceeds the reference rate as determined by the Central Bank of Cyprus. Today the reference rate set by the Central bank of Cyprus is set at 12,57% per annum and it is reviewed quarterly.

The amendment to the Criminal code was enacted with a view to combat loan sharking and profiteering. Unwittingly the law had an adverse effect on a number of commercial transactions where there was no element of loan sharking or profiteering.

The legislature recognizing the hardships created on 16 December 2011 further amended the provisions of the Criminal Code so that a number of transactions are no longer caught by the provisions of the Criminal Code.

In particular in addition to loans made by licensed financial institutions (which were always excluded) the following transactions are also exempt from the provisions of the Criminal Code relating to loan sharking and profiteering:

(i) loans where the borrower and the lender are legal persons and are considered to be related parties for the purpose of Section 33 of the Cyprus Income Tax Law;

(ii)  loans granted by body corporates to other companies, where the funds have originated directly or indirectly from sources outside Cyprus, provided that:
o the amount of the loan exceeds €1 million; and
o the minimum disbursement is €500,000;

(iii) loans provided to body corporates where the loan  is disbursed outside Cyprus and provided that:
o the amount of the loan exceeds €1 million; and
o the minimum disbursement is €500,000.

While some grey areas still exist in relation to the ambit of the provisions of the Criminal Code relating to the offence created, the amendment is a step in the right direction as it takes into account commercial realities present in the majority of financing transactions and other cross border transactions.

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