The New Tax Treaty With Russia Could Be A Game Changer For Cyprus

Earlier this week, the Cypriot Minister of Finance, Constantinos Petrides, and the Deputy Minister of Finance of the Russian Federation, Alexey Sazanov, signed a protocol amending the agreement for the avoidance of double taxation concerning taxes on income and capital between Russia and Cyprus.

The agreement will come in effect from the 1st of January 2020, and the stakes for Cyprus’ professional services sector are too high. The new deal is much less attractive for Russian investors than the previous one, and no one can say for sure that Russian businessmen will keep investing through Cypriot companies. For many years, the tax treaty with Russia was used to attract wealthy Russians to the island. Thousands of Russians had registered companies in Cyprus, since the beginning of the ’90s. Low taxes was one reason. The other one was the loose rules and checks, regarding money coming in and out of the country. The descend of Russian businesspeople and companies in Cyprus helped create the country’s Cyprus’ professional services sector. But it also became its biggest reputational problem as reports from international institutions and media on money laundering and fraud started becoming more and more frequent. It was only after the financial crisis of 2013 that Cyprus decided to change course and implement all the international rules about money laundering and tax base erosion. It can be argued that local authorities and banks went too far in implementing stricter checks and balances on Russian investments, as many companies complained that it became tough for them to complete transactions. As a result, in recent years, many companies moved their corporate bases in other countries.

The new double tax treaty with Russia will be a game-changer for the future of Russian investment in Cyprus. According to a note by EY Cyprus, regular withholding (WHT) tax on dividend payments under the new treaty will increase to 15% (provided the recipient is a beneficial owner of the dividend income). Reduced 5% WHT is applied, amongst others, to the following categories: a) if the beneficial owner of the dividends is a company whose shares are listed on a registered stock exchange provided no less than 15% of voting shares of that company are in free float and which holds directly at least 15% of the capital of the company paying the dividends throughout a 365 day period that includes the day of payment of the dividends, or b) if the beneficial owner of the dividends is an insurance undertaking or a pension fund. Withholding tax rate on interest payments under the Treaty is increased to 15% (provided the recipient is a beneficial owner of the interest income). Reduced 5% WHT is applied if the beneficial owner of the interest is a company whose shares are listed on a registered stock exchange provided that no less than 15% of voting shares of that company are in free float. Reduced 0% WHT is applied, amongst others, to the following categories (provided beneficial ownership test is met): a) insurance undertakings or pension funds; b) banks; c) the interest on government bonds, corporate bonds, Eurobonds listed on a registered stock exchange. Withholding tax rate on royalties remains unchanged at 0%.

Even though the Russian Federation’s decision to push for the amendment of the treaty was considered by many as an act of revenge, after Cyprus moved closer to the USA in recent years, Russian officials declared that the reasons were strictly economic, in order to strengthen the country’s fiscal situation. If Russian companies flee Cyprus in 2021 because of the new treaty remains to be seen. A critical factor will be whether similarly strict tax changes will come into force and in other financial centers in Europe, namely Malta, Luxembourg, The Netherlands and Switzerland. Russian officials assured their Cypriot counterparts that in order to maintain a level playing field, they would seek the same agreement with other countries as well.