Russia To Ditch Cyprus As A Legal Offshore & Banking Tax Haven

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Russia will pull out of a double taxation treaty with Cyprus after Cypriot officials refused to agree to Moscow’s demands over a new business tax regime, Russia’s Finance Ministry stated on Monday (August 10). In a statement the Russian Finance Ministry said Cyprus did not agree with Russia’s plans to levy a new 15% tax on dividend payments which flow from Russian businesses to parent companies incorporated in Cyprus.

The new tax was first outlined by President Vladimir Putin as a measure to help cover the costs of the coronavirus pandemic by clamping down on Russian firms sending their profits overseas to minimize tax payments in Russia. It is due to come into force from January 1st 2020, but requires Russia to amend various bilateral agreements with other countries. Hence the negotiations with Cyprus.

The Mediterranean island is a popular legal base for Russian businesses to park money offshore due to its low 12.5% corporate taxes, privacy laws, legal system based on English law, and status as a member of the European Union.

The Russian government estimates that almost two trillion rubles (US$27 billion) of corporate earnings flowed from Russia to Cyprus in 2019 alone.

The move, if implemented will make it will be less profitable for Russian firms to incorporate in Cyprus should the tax treaty be abandoned. Moscow’s plans to target capital outflows to low-tax jurisdictions have also surprised foreign firms based in Russia, who use dividends as a legitimate way of sending profits from their Russian subsidiaries back to their parent companies.

Chris Devonshire-Ellis of Dezan Shira & Associates, whose firm has a Russian desk and assists Russian companies establish operations in Asia comments: “This issue is very important, as many Russian HNWI individuals and their international businesses have accounts in Cyprus and use these to invest elsewhere internationally. Due to sanctions, subsidiary companies operating overseas directly from Russia can face problems with being considered ‘high risk’ and Cyprus has offered one way out of this. There are still four months to go before the January deadline and we expect some sort of agreement to be in place between Cyprus and Russia prior to then.”

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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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