Cyprus: The Cyprus/Russia Double Taxation Agreement: Impact Of The Protocol

Last Updated: 7 October 2013
Article by Philippos Aristotelous
Most Read Contributor in Cyprus, December 2017

The Protocol to the double taxation agreement between the Republic of Cyprus and the Russian Federation entered into force on January 1, 2013, following the completion of formal ratification procedures in 2012. Now that the protocol has been in force for almost a year it is a suitable opportunity to assess its impact.

Many of the changes made by the Protocol were of a detailed nature, reflecting the changes in practice that have occurred since the double taxation agreement was agreed in the late 1990s. However, most discussion of the Protocol centred on the substantial changes regarding information exchange and the taxation of capital gains. It is also important not to overlook what did not change, particularly the favorable withholding tax rates available under the original agreement.

Exchange Of Information

The new exchange of information provisions reproduce Article 26 of the OECD Model Tax Convention verbatim , creating an obligation to exchange information that is foreseeably relevant to the correct application of the DTT and for facilitating the administration and enforcement of domestic tax laws of the contracting states. Neither contracting state may engage in "fishing expeditions", nor may they request information that is unlikely to be relevant to the tax affairs of a given taxpayer. When formulating any requests for information, the state making the request should demonstrate the foreseeable relevance of the requested information. In addition, it should have exhausted all reasonable and proportionate domestic means to obtain the information concerned.

A contracting state cannot refuse a request for information solely because it has no domestic tax interest in the information or solely because it is held by a bank or other financial institution. Finally, where information is exchanged it is subject to strict confidentiality rules: information communicated must be treated as secret and may only be used for the purposes provided for in the DTT.

In fact, Cyprus had already created a mechanism for information exchange under Article 26 even before the new Protocol was concluded. Law 72(I) of 2008 amended the Assessment and Collection of Taxes Law ("the ACT Law") to incorporate the exchange of information provisions of Article 26 of the OECD Model Tax Convention of 2005 in double taxation agreements between Cyprus and other jurisdictions, and to lay down the procedural framework for information exchange.

The ACT Law as amended contains the following important safeguards for the taxpayer:

  • The Cyprus tax authorities may provide information only where the other contracting state involved is under a reciprocal obligation to disclose information.
  • The prior written consent of the Attorney-General of Cyprus is required for the tax authorities to exercise their powers to collect the information requested.
  • The right to legal professional privilege is maintained, and any information passing between professional legal advisors and their clients may not be disclosed to third parties.
  • Requests to the Cyprus tax authorities for information must include the following particulars:

    • The identity of the person under examination.
    • A description of the information requested and the form and manner in which the requesting state wishes to receive it.
    • The tax purpose for requesting the information.
    • The reason for believing that the requested information is held by the Cyprus tax authorities or is in the possession or under the control of a person within the jurisdiction of Cyprus.
    • The name and address of any person who may hold the information requested, if known.
    • A declaration that the provision of such information is in accordance with the legislation and the administrative practices of the requesting state and that where the requested information is found within the jurisdiction of the state in question, the relevant authority may obtain the information according to its laws and according to the terms of its ordinary administrative practices.

Exchange of information on request involves a specific response to a specific request. Such requests are dealt with exclusively by the International Tax Relations Unit ("ITRU") of the Department of Inland Revenue. Exchange of information may take place only through the ITRU: direct exchange of information between tax officers on an informal basis is prohibited.

When the ITRU receives a request for information, it forwards it to the District Tax Office which deals with the tax affairs of the taxpayer concerned. The District Tax Office gathers all the requested information and forwards it to the ITRU. The Cyprus tax authorities may institute inquiries to gather the information requested in accordance with the ACT Law, which empowers them to require any person, by notice in writing, to provide such particulars as they may require for the purposes of the ACT Law with respect to the taxpayer's affairs for any year of assessment, or to attend and give evidence and produce any accounts, books or other documents in his custody or under his control relating to such matters. The tax authorities may apply to the court for a search warrant if there is reasonable cause to believe that an offence under the ACT Law has been or is being committed and that legally admissible evidence regarding the commission of the offence may be found in the premises for which the warrant is requested. The court may issue a search warrant authorizing any police officer to enter the building specified in the warrant, except a building of a person who according to the Law of Evidence is bound to observe professional secrecy.

Furthermore, the requirement that requests to the Cyprus tax authorities for information must be accompanied by detailed information rules out "fishing expeditions" based merely on suspicion. A request must be much more than a brief note of the name and identifying information of the individual concerned. Instead, a detailed case must be made, with the criteria set out in a lengthy legal document. In effect, this means that the authorities requesting the information must already have a well-founded case before they request the information. It will not be possible to follow up a suspicion without first gathering significant evidence.

Capital Gains

Following the dissolution of the Soviet Union in 1991 most of the newly independent states which emerged, including Russia, initially adopted the Cyprus-USSR double taxation agreement which had previously applied to them. In 1998 the old Cyprus-USSR agreement was replaced by a new agreement between Cyprus and Russia. One of the greatest attractions of the Cyprus-USSR treaty is its highly favorable provisions regarding capital gains on disposal of shares, and the new 1998 agreement left these in place. It provides that movable property including shares is taxable only in the country of residence of the owner and, unlike most modern double tax agreements, made no exception for shares in "property-rich" companies, that is, companies whose assets principally comprise real estate. Since Cyprus imposes no tax on disposals of shares except and to the extent that the gain is derived from real estate in Cyprus, Cyprus companies became an ideal means of holding real estate in Russia, effectively allowing property to be disposed of free of capital gains tax or transfer charges by selling the shares in the company that owns the property rather than selling the property itself.

The Protocol closes this perceived loophole, giving the right to tax capital gains arising on disposal of shares in a property rich company to the country where the property is physically located. The determination of whether shares of a company derive more than 50 percent of their value from immovable property will normally be done by comparing the value of such immovable property to the value of all the property owned by the company without deducting debts or other liabilities.

Furthermore, the source taxation rule will not apply if the share disposal is part of a qualifying reorganization, or if the relevant shares are listed on a recognised stock exchange, or if the seller is a pension fund, provident fund or the government of either country.

The Protocol provides for a transition period of four years for the new provisions regarding capital gains. The relevant article will not become effective until the first day of the calendar year following four years after the protocol as a whole takes effect. This will be January 1, 2017, giving time to consider and implement measures to mitigate any negative impact of the change.

When the Protocol was signed in 2010 Russia indicated that it intended to amend the agreements with its other important double taxation treaty partners in order to introduce similar provisions regarding source taxation of capital gains on disposal of shares in property rich companies. Russia's agreements with Switzerland and Luxembourg have been amended, and the new provisions on capital gains on disposal of shares in property rich companies take effect immediately, without any transition period. The agreement with the Netherlands has not been amended, but that agreement already contains a provision effectively eliminating the loophole in most cases.

Withholding Tax Rates

One of the key elements of the Protocol is that the current beneficial withholding tax rates applicable to dividends (five percent on investments above the qualifying threshold and 10 percent otherwise), interest (zero) and royalties (zero) have not been increased.

The definition of the term "dividend" has been clarified to include distributions made by mutual funds and payments to the holders of depositary receipts over shares. Any interest reclassified by the Russian tax authorities as dividends (for example under thin capitalization rules) will be subject to the same withholding tax rates as dividends.

Removal Of Cyprus From The Russian "Blacklist"

One of the benefits of the Protocol's entry into force was the removal of Cyprus from the "List of the States and Territories providing preferential tax treatment and (or) not requiring disclosure and furnishing of the information upon conducting of financial transactions (offshore zones)" appended to Order 108n of the Ministry of Finance of the Russian Federation dated November 13, 2007.

When Cyprus was deleted from the list with effect from January 1, 2013 companies incorporated in Cyprus became eligible to benefit from the participation exemption introduced by Russia with effect from January 1, 2008, under which dividends received by Russian companies from qualifying participations will be exempt from tax, provided that:

  • The recipient holds at least half the equity of the distributing entity and the participation confers the right to receive at least half of the dividend distributed;
  • The recipient has held the investment for at least one year at the time the decision is made to distribute the dividend; and
  • The cost of the investment is RUR500m (approximately EUR13.6m) or more.

Furthermore, transactions between unrelated Russian and Cyprus companies will no longer be subject to the automatic transfer pricing control scrutiny in Russia that applies to locations included in the "blacklist."

With effect from January 1, 2013 the "blacklist" of countries ineligible to benefit from the exemption is: Andorra, Anguilla, Anjouan, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Brunei Darussalam, Cayman Islands, Channel Islands (Guernsey, Jersey, Sark, Alderney), Cook Islands, Dominica, Gibraltar, Grenada, Hong Kong SAR, Isle of Man, Labuan, Liberia, Liechtenstein, Macau SAR, Maldives, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Palau, Panama, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and Grenadines, Samoa, San Marino, Turks and Caicos Islands, United Arab Emirates and Vanuatu.

The Impact Of The Amendments

The signing of the Protocol was generally welcomed as a positive development which removed a source of contention (namely information exchange) that had threatened to harm the cordial relations between Cyprus and Russia. It was recognised that the move to source taxation of capital gains on disposal of shares in property rich companies was inevitable, and by being the first to agree to this, Cyprus gained a significant advantage compared with Switzerland and Luxembourg, its main competitor jurisdictions. Access to the Russian participation exemption gives Cyprus an advantage over most other international financial centers such as the British Virgin Islands, the Channel Islands, the Isle of Man, Malta and Mauritius. Finally, despite the predictions of the doom-mongers, the "bail-in" of depositors in Cyprus's two largest banks in March 2013 did not result in an exodus of Russian business. Overall, therefore, it is fair to conclude that the Protocol has had a benign effect.

Originally published in Wolters Kluwer Global Tax Weekly, 26 September 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Philippos Aristotelous
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions