On April 29 2011 Cyprus enacted new legislation 1 amending the Criminal Code. The new legislation introduces an interest rate ceiling for personal or intra-group loans that should not be exceeded. The interest rate ceiling is calculated using a formula based on half the average bank lending rate of the previous year (including commissions and the other charges that banking institutions charge on consumer loans), plus a margin of between five and 10 percentage points, which varies according to various risk factors. This interest rate ceiling is calculated and published by the Central Bank of Cyprus quarterly - on June 21 2011 it was set at 12.18%.
The interest ceiling notably applies to lenders that are not financial institutions and catches interest received or charged on granting of loans, extension of repayment, pre-payment and renewal. Breach of the provisions constitutes an offence. On conviction, a person may be liable to imprisonment of up to five years, a fine capped at €30,000 or both. The new legislation has not yet been tested and it is unclear whether it will apply to non-Cypriot entities that act as lenders or to borrowers (either Cypriot or non-Cypriot).
While the legislature intended to target the increasing problem of loan sharking and profiteering, the decision may ultimately have an impact on the structuring of existing and proposed intra-group loans. 2
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