Article V of the protocol to the double taxation agreement ("the DTA") between Cyprus and Russia that entered into effect on 1 January 2013 amended the definition of dividends set out in paragraph 3 of Article 10 of the DTA.
The new definition, including the text added by the protocol in italics and the deleted text struck through, is reproduced below.
The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income – even paid in the form of interest – which is subjected to the same taxation treatment as income from shares by the tax legislation of the State of which the paying company is a resident. This term also means any payments on shares of the mutual investment funds or similar collective investment vehicles (other than those mentioned in paragraph 5 of Article 6 "Income from Immovable Property" of the Agreement). The term "shares" as used in this Article shall include depository receipts thereof.
Article 10 of the DTA provides for a reduced rate of tax of 5% of the gross amount of the dividends if the beneficial owner of the dividends has directly invested the equivalent of €100,000 or more in the paying company. Otherwise the rate is 10%.
In accordance with the provisions of Article 25, "Mutual Agreement Procedure" of the DTA the competent authorities of Russia and Cyprus have agreed to the following common understanding and interpretation of the provisions of Article 10 of the Agreement, which is set out in a letter issued by the Russian Ministry of Finance1 .
The concept of direct investment for the purposes of Article 10 means either the acquisition of shares on issue or the purchase of shares on the securities market or direct from the previous owner. The minimum investment criterion applies directly to each individual company. However, under Russian law a mutual fund is not a legal entity, but a distinct and autonomous pool of assets consisting of the property transferred to the trust, a share in the ownership of which is certified by a certificate issued by the management company. There is a clear distinction between the property comprising the fund and the management company managing it.
Accordingly, investments in mutual funds do not satisfy the definition of direct investment in the capital of a legal entity and the reduced rate of tax of 5% is not available. Consequently, the 10% tax rate applies, subject to the Russian tax agent being provided with the requisite confirmation2 that the beneficial owner of the units is resident in Cyprus for tax purposes.
Footnotes
1. Letter of the Tax and Customs Tariff Policy Department of the Russian Federal Ministry of Finance of 14 February 2013 № 03-08-05/3935 on taxation of income paid on shares, owned by a resident of the Republic of Cyprus, closed-end investment fund.
2. Under paragraph 1 of Article 312 of the Russian Tax Code
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