Russia & Cyprus Patch Up Tax Differences After DTA Withholding Tax Row

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Russia and Cyprus have announced that they have resolved a dispute concerning the two countries’ double tax agreement. We commented on the case in our August 14 article here after the Russian Ministry of Finance announced that it would terminate the Russia-Cyprus double tax agreement, after negotiations broke down on a revision to increase tax on cross-border dividends and interest income.

In a move designed to curtail the movement of Rubles out of Russia, the Russian Ministry of Finance disclosed it had been engaged in discussions with Cyprus with a view to amending the existing Double Tax Treaty to introduce withholding tax of 15 percent at source on dividends and interest income. The Russian Ministry disclosed that the Cypriot side put forward its own proposal, which was not accepted, with the Ministry considering it would result in continued erosion of the Russian tax base. It then announced that it would terminate the treaty.

Meetings subsequently held between Cyprus and Russia have now resulted in a compromise.

A statement from the Cypriot Government said, in relation to withholding tax on interest and dividends, that: “The Cyprus side secured, among others, the reduction of the said withholding tax (to nil or five percent as appropriate) of regulated entities, such as pension funds and insurance undertakings as well as listed entities with specific characteristics. Additionally, exemption from the said withholding tax applies on interest payments from corporate bonds, government bonds, and Eurobonds. The Cypriot side has also secured the maintaining of zero withholding tax on royalty payments.”

Chris Devonshire-Ellis of Dezan Shira & Associates comments “This indicates that additional qualifying documentation from Russia entities seeking to take advantage of lower withholding tax rates will now be required. This should not create any issues for bona fide businesses but may impact on money from Russia just being parked in Cyprus for evasive purposes. Russian businesses will need to examine these new protocols before depositing money with banks in the territory”

The Cypriot Government said a Protocol to the agreement would be signed in the coming months and would apply from January 1, 2021.

Russian Deputy Finance Minister Alexey Sazanov said in a Finance Ministry statement that Russia would no longer seek to terminate the agreement. He stated: “In the coming month, we also plan to complete negotiations with Luxembourg and Malta on the same terms as we offered Cyprus. is also awaiting an official response from the Netherlands to directed proposals to revise the tax agreement in the coming weeks. If the Netherlands agrees to negotiate, they will be offered the same conditions as the Republic of Cyprus.”

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Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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