In the past, Cyprus and Russia had a double tax agreement. As of August 2020, the Russian Ministry of Finance announced that this double tax agreement would soon face changes.
The Russian Ministry of Finance released an official statement on August 3. In this statement, it announced it would try to end the double tax agreement. The report cited negotiations breaking down when working on a revision to increase taxes on cross-border interest income and dividends.
The Russian Ministry of Finance wanted to adjust the pact to include a withholding tax at the source of 15 percent, applying to interest income and dividends. The Cypriot side of the agreement followed up with its proposal, which the Russian side did not accept. The Russian Ministry of Finance felt that the Cypriot proposal would have eroded the tax base for Russia, something the country is already struggling with.
According to the statement, the Russian Ministry indicated that it would facilitate the tax-free withdrawal of financial resources from Russia that are significant, applying through the Russian Federation’s territory and the Cyprus jurisdiction.
By terminating the double taxation agreement, this would deliver on the request made by Russian President Vladimir Putin for assurance that any payments made on income earned overseas that go to low-tax territories would include a taxation rate of a minimum of 15 percent.
According to the Russian Ministry, the current double taxation agreement with Cyprus has attractive taxation conditions. It allows dividend payments to Cyprus to be dropped to just five to 10 percent, with loan interest dropping to zero percent. Given that the corresponding Russian rate is 13 to 15 percent, this is at least two times less.
To remedy the discrepancy, the Russian Ministry of Finance proposed adjusting the tax agreement so dividends and interest would have a 15-percent tax rate. According to the Ministry, the partners tried to include numerous exceptions that would reduce the effect of the changes on the Russian treasury. As such, the Russian department chose to begin denouncing the agreement in the form of a federal law submitted to the State Duma.
Reaching a Compromise
Several weeks after the initial statement released by the Russian Ministry of Finance, Cyprus and Russia were able to reach a compromise instead of entirely nullifying the previous tax treaty. The two countries scheduled meetings for August 10 and 11, and by August 10, they announced that they had reached a compromise.
The countries have still not released the full details of the compromise, but we know some of the essential elements.
According to the Cypriot Government, Cyprus managed to convince Russia to allow the withholding tax for dividends and interest to top at zero to five percent, based on the appropriate rate, for regulated entities and listed entities that have specific characteristics. This exemption also applies to interest payments from Eurobonds, government bonds, and corporate bonds. Cyprus also secured that the current zero withholding tax for royalty payments would remain.
The Russian Deputy Finance Minister, Alexey Sazanov, released a statement indicating that Russia does not plan to try to end the agreement with the compromises.
This fall, the two countries will sign a Protocol to adjust the agreement. It will then go into effect on January 1, 2021. Russia also plans to offer the same terms to Malta and Luxembourg in negotiations in the upcoming months. Currently, Russia is waiting for the Netherlands’ response to a proposal to revise the two countries’ tax agreement. Russia plans to offer the Netherlands the same conditions as Cyprus, Malta, and Luxembourg.
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