Russian Federation: Cyprus-Russia: The Amendments To The Double Tax Treaty

On 16th April 2009, the governments of Russia and of Cyprus initialed a Protocol to the existing Double Tax Treaty between the two countries. This Protocol is expected to be signed by the end of the year and come into force in the beginning of 2010.

The entry into force of the Protocol will effectively lead to the removal of Cyprus from the Russian blacklist of non-cooperative jurisdictions. Subsequently, and as a result of the aforementioned, Cypriot companies would be eligible to qualify for the Russian participation exemption in cases of dividends distributed from Cyprus subsidiaries.

Major changes occurred regarding the limitation of benefits, exchange of information and the taxation of capital gains deriving from the sale of shares in a real estate company provided in the Protocol. Brief outlines of those Protocol provisions are provided further below:

1. Exchange of Information (Art.26)

New provisions under this section provide for the extended scope of exchange of information including taxes covered by the Tax Treaty and extensively taxes of every kind including among others indirect taxation. The lifting of the banking secrecy shall put the obligation to any competent Contracting authority to collect information for exchange purposes without providing any refusal grounds of possession. Additionally, information gathering measures should be used to obtain the requested information despite the lack of domestic interest.

In line with the above, it should also be noted that the legislation of Cyprus (Assessment and Collection of Taxes Law) has been revised accordingly, as to enable the exchange of information with other jurisdictions, by the incorporation into the domestic legislation of the exchange of information provisions of Article 26 of the OECD Model Treaty. This is seen as a measure to tackle tax evasion, which as a result enabled the removal of Cyprus from various blacklists for non-cooperative jurisdictions.

As a result, confidentiality and secrecy provisions under the legislation have been lifted, thus affecting the bank or professional secrecy laws, without though affecting the legal professional privilege.

As per the revised legislation of Cyprus, information may only be collected by the Cypriot Tax Authorities if the written consent of the Attorney-General is obtained.

2. Limitation of Benefits (Art. 29)

A limitation of benefits clause has been incorporated to the new Protocol, the ultimate aim of which is to avoid Treaty abuse. Accordingly, a resident of a Contracting state shall not be entitled to any tax minimization or exemption on income deriving from the other State if it is concluded by the authorities of the Contracting States that the main purpose for the presence of the resident is the application of the Treaty benefits where under different circumstances they would not have applied.

As per the above, it is important to note that such limitation of benefits is subject to the mutual agreement of the two Contracting States, to be achieved as a result of the mutual consultation of the relevant tax authorities.

3. Gains from alienation of property (Art.VII)

The article concerning the taxation of capital gains as a result of the alienation of shares in real estate companies had gone through significant changes especially when compares to the current provisions of the existing Treaty. Accordingly, the new provision grants the right to a Contracting State to tax gains from the alienation of shares of companies the value of which is deriving by more than 50% from property situated in the other Contracting State.

Alienation of shares in the context of corporate reorganization, in companies listed in a recognized stock exchange as well as in a pention fund, a provident fund and the Governments of Cyprus or Russia are excluded from the scope of this provision.

Art VII comes into effect at the time of expiration of a four-year period from the date the Protocol comes into force.

4. Other important remarks

  • The withholding tax rates on interest, royalties and dividends remain unchanged.
  • For the reduced withholding tax rate on dividend the minimum investment of USD 100,000 in the capital of the subsidiary company was revised to EUR 100,000.
  • Definitions of dividends and interest have been revised as to be in line with the OECD Model Treaty.
  • Mutual Investment Funds and collective investments vehicles have been included in the definition of dividends. Such payments would be subject to a 10% withholding tax at source.
  • The residency provision has been revised.
  • The definition of a permanent establishment has been extended.
  • The International Traffic article has been replaced.

The important changes brought about by the new Protocol may affect the current Russian-Cypriot cross-border tax structures, therefore careful consultation should be requested in order to overcome any upcoming hurdles. Among others, existing structures may be affected especially where:

  • The incorporation country of the company used for the investments and seeking the application of the Treaty benefits is not Cyprus however, the company itself has the status of a Cypriot tax resident;
  • A real estate company has been incorporated for the investment in Real Estate in either one of the two countries;
  • The investment in the capital of a Russian company is under the minimum imposed threshold of EUR 100,000;
  • The Permanent Establishment provisions may have application;
  • The Holding Company is deriving income from mutual investment funds or collective investment schemes.

Equally, consultation may be sought by investors especially with regard to the exchange of information provisions and their respective application and enforceability in Cyprus.

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.

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