Cyprus: Russia-Cyprus (Income And Capital) Tax Treaty

Last Updated: 19 October 2000

Most Read Contributor in Cyprus, December 2017

On the 25th June 1999, the Russian Duma approved the "Agreement between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital" (hereinafter referred to as the "Tax Treaty"). The Tax Treaty was signed on the 5th December 1998 and the Council of Ministers of the Republic of Cyprus formally approved it on the 10th December 1998. The provisions of the Tax Treaty will only be effective for taxable years and periods beginning on or after the 1st January 2000. Until that date, the 1982 tax treaty between Cyprus and the former Soviet Union will remain in effect. In general, the Tax Treaty follows the OECD Model with certain modifications. Notable provisions are described briefly below.


In parallel with the OECD Model, Article 1 of the Tax Treaty states that it applies to "persons who are defined under Article 4 of the Tax Treaty as "any person who, under the laws of that State, is liable to tax there by reason of his or her domicile, residence, place of management, place of registration or any other criterion of a similar nature". The definition of residence in Article 4 is in line with the OECD Model but adds in the applicable list of criteria for the taxation of a resident "the place of registration". It is understood this arose because business enterprises in Russia are under an obligation to register with the Russian tax authorities. However, the question is what will be the implications under Russian tax law if a permanent establishment (please refer to section II below) which is registered with the Russian tax authorities and thus qualifies as a resident under the Tax Treaty seeks to avail itself of protection? The Tax Treaty covers taxes both on income and capital. In the case of Cyprus, it covers personal and corporate income tax, special contribution to the defence fund, capital gains tax and immovable property taxes. In the case of Russia, it covers income tax for individuals and corporations and taxes on property of individuals and corporations.


Corresponding with the OECD Model, under the Tax Treaty, the term "permanent establishment" (PE) is defined as a fixed place of business through which the business of an enterprise of one Contracting State is wholly or partly carried on in the other Contracting State(Article 5, para.1). The definition set out in para.1 of Article 5 contains the following conditions for the creation of a PE:- (1) the existence of a "place of business" i.e. a facility such as premises or, in certain instances, machinery or equipment; (2) the place of business must be "fixed," i.e. it must be established at a distinct place with a certain degree of permanence; (3) the carrying on of the business of the enterprise through this fixed place of business which means that the persons who are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. A building site, construction, assembly or installation project constitutes a PE only if it lasts for more than 12 months (Article 5, para.3).


Under the Tax Treaty, the profits of an enterprise of one State will only be "taxable in that State, unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein". The attribution of profits to the PE should then take place as if the PE were a distinct and separate enterprise, "dealing wholly independently with the enterprise of which it is a permanent establishment" (Article 7, paras. 1 and 2). The force-of-attraction principle thus applies to business income from a PE, except if the enterprise can show that the sales in question were not made in order to derive benefit from the treaty. Royalties and other payments, etc., are specifically excluded from the computation of the income that is attributed to the PE, and so is the interest. Head office overhead expenses will be allowed as deductions in computing the taxable profits of a PE assuming that they can be reasonably attributed to the PE. This treatment is in line with the OECD Model.


Profits from the operation of ships or aircraft in international traffic are taxable only in the country where the residence of the enterprise is located irrespective of the existence or not of a permanent establishment in the other country. "International traffic" is defined in Article 3(1)(g) to cover any transport by ship or aircraft or road vehicles operated by a resident of a Contracting State, except when the transport is operated solely between places in the other Contracting State. In line with the conditions used in the OECD Model, Article 9 of the Tax Treaty requires that transfer pricing between affiliate or related companies must be carried out at arm’s length. Otherwise, an adjustment can be made by the tax authorities.


The dividend withholding tax rate in Russia is, in principle, 15 per cent. This rate is reduced to 5 per cent of the gross dividends if the beneficial owner has invested directly in the capital of the company paying the dividends US$100,000. In all other cases, the rate is 10 per cent (Article 10 of the Tax Treaty). The term "beneficial owner" is not defined in the Tax Treaty; the Commentary, however, to the 1977 OECD Model says that "the limitation of tax in the State of source is not available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the other Contracting State." It should be noted that Cypriot companies which are owned 100 per cent by non-Cypriots and derive their entire income from non-Cypriot based sources commonly referred to as Cypriot international business companies ("IBCs") are not subject to any dividend withholding taxes by virtue of domestic law. IBCs are subject to corporate tax at the rate of 4.25 per cent on their taxable profits. By virtue of Article 24 ("the Elimination of Double Taxation Article") the Cypriot corporate tax will be credited against the Russian dividend withholding tax with the result that no further Cypriot taxation is suffered.

Furthermore, withholding tax on interests is, in principle, 15 per cent in Russia. Under the Tax Treaty, this withholding tax is reduced to nil (Article 11). This agrees with the OECD Model. The term "interest" in Article 11 includes income from bonds, debentures and securities. Royalty withholding tax is levied in Russia at a rate of 15 per cent. This is reduced to nil under the Tax Treaty (Article 12). The definition of the term "royalties" concurs with the OECD Model. It is defined as "payments of any kind received as a consideration for the use of, or the right to use, any copyright or literary, artistic or scientific work including cinematograph films and recordings for radio and television broadcasting, any patent, know-how, computer programs, trade mark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience". Articles 11(5) and 12(5), following the basis of the OECD Model, contain an anti-avoidance, arm’s length rule: where, by virtue of a "special relationship" between the payer and the payee of the interest and royalties, the amount of interest or royalties exceeds that which would be payable between parties at arm’s length, Articles 11 and 12 will only apply to such amount as would have been paid between unrelated parties. Cyprus does not levy withholding tax on either interest or royalty payments by IBCs.


The general rule [contained in Article 13(4)] is that gains from the alienation of property are only taxable in the state of which the alienator is resident: to this rule there are exceptions for immovable property [Article 13(1)] and the property of a permanent establishment or fixed base [Article 13(2)]. Article 13(3) unlike the other two exceptions to the general rule, grants the exclusive right to tax gains from the alienation of ships, aircraft and related property to the state where the alienator is resident (in line with the taxation of income from shipping, aircraft, etc., in Article 8). Income derived by a resident of a Contracting State in respect of professional services, etc. may only be taxed in the state of residence unless he has a fixed place regularly available to him in the other state or the stay in the other Contracting State exceeds 183 days in any 12-month period which begins or ends in the fiscal year in question (Article 14 of the Tax Treaty). Article 15(1) provides that the state of residence of a taxpayer should have the exclusive right to tax income from employment, unless the employment is exercised in the other Contracting State in which case the state where the employment is exercised may also tax such remuneration as is derived therefrom.

However, remuneration in respect of employment exercised in the other Contracting State is exempt there (and therefore taxable only in the state of residence of the employee) if three requirements are all met: (1) the employee is present in the other state for a period or periods not exceeding 183 days in the fiscal year concerned; (2) the remuneration is paid by, or on behalf of, an employer who is not resident in the state where the employment is exercised; and (3) the remuneration is not borne by a permanent establishment or fixed place of the employer in the state where the employment is exercised. In accordance with Article 19 pensions and other similar remunerations are only taxed in the country where they are paid from.


Double taxation is eliminated by giving a credit of the tax withheld in the other state against the tax payable in the country of the recipient of the income. However the tax credit cannot exceed the amount of the tax payable in the country of residence of the recipient. In the case of Cyprus, in respect of dividend income from Russia, in addition to the Russian withholding tax, tax credit is also given for the underlying tax on the profits out of which the dividends are paid. Moreover, tax paid in Cyprus on income or capital which is also taxable in Russia is deducted from tax payable in Russia on the same income or capital. In Russia, the credit method has been adopted as the method of choice to eliminate double taxation. Article 23(3) contains tax sparing credit provisions which allow for a credit to be granted in Cyprus in respect of Russian taxes which Russia could have imposed but which the Russian tax payer has been spared due to incentive legislation. Article 24 of the Tax Treaty corresponds substantially with the non-discrimination article of the OECD Model. Article 24(1) prevents nationals of one Contracting State from being subjected to any taxation which is more burdensome than that imposed on nationals of the other Contracting State in the same circumstances. Article 24(2) concerns the situation where an enterprise of one Contracting State has a permanent establishment in the other Contracting State-taxation is to be not less favourably levied on that permanent establishment than is levied on enterprises of the first state carrying on the same activities. Finally, Article 24(3) provides that interest, royalties and other disbursements paid by an enterprise of one Contracting State to a resident of the other Contracting State should be deductible in calculating the taxable profits under the same conditions as if they had been paid to a resident of the same Contracting State as the enterprise.


The mutual agreement procedure under the Tax Treaty is similar to that of the OECD Model (Article 25, paras. 1-4). However, the Tax Treaty contains a time limit of two years (as opposed to the three year time limit of the Model) within which the mutual agreement procedure is to commence. The exchange of information under Article 26 of the Tax Treaty is identical to the OECD Model. Hence, any information received under the Tax Treaty is to be treated confidentially, as under domestic laws. Moreover, Article 26(2) provides that no state is obliged to provide information if the provision of such information will contravene local laws or reveal industrial/ trade secrets.


The Tax Treaty is generally based on the OECD Model and continues the process of bringing Russia’s tax regime closer to western models, with increased emphasis on anti-avoidance. Cyprus’ current role as an important gateway for foreign investments into Russia is maintained and strengthened. The Tax Treaty will remain in force for at least five years after the 1st January, 1999 (as per Article 30 of the Tax Treaty).

This note is intended to provide general information about a recent development which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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.

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