It's official: on 10 August 2020, the two countries agreed on the final version of the Protocol amending the Cyprus-Russia Double Tax Treaty (DTT). The decision was reached during the Moscow visit of a Cypriot state delegation headed by Mr. Constantinos Petrides, the Minister of Finance.
The announcement came after a series of negotiation rounds and is part of a broader effort by both states to strengthen their economic and business ties.
The Cyprus-Russia DTT was originally signed in 1998. The Treaty was subsequently amended by a Protocol in 2010.
Earlier this year, on 25 March 2020, the President of the Russian Federation, Mr. Vladimir Putin, gave an address on the measures the government was taking in response to the COVID-19 pandemic.
Among others, these included negotiating with foreign jurisdictions to amend the provisions relating to withholding taxation on interest and dividends in double tax treaties. The goal was to set a minimum withholding tax rate of 15% on interest and dividend payments from Russia. The overall effect would be to boost government revenue in the anticipated pandemic-induced economic crisis.
Following the President's address, the Russian Ministry of Finance sent a formal request to its Cypriot counterpart to initiate negotiations to amend the following provisions of the Cyprus-Russia DTT with respect to the applicable withholding tax rates:
- Article 10 (Dividends)
- Article 11 (Interest)
According to a press release by the Cypriot Ministry of Finance from 10 August 2020, the Protocol to the Cyprus-Russia DTT amends the withholding tax rate as follows:
- On dividend payments, from the current 5% or 10% (depending on the case) to 15%; and
- On interest payments, from the currently applicable 0% to 15%.
It is important to note that the new provisions do not affect royalty payments. These will continue to be subject to a 0% withholding tax rate, as per the current Cyprus-Russia DTT.
In addition, there are several exceptions where the current rates of 0% or 5% will continue to apply.
At the request of Cyprus, the two parties agreed that the lower withholding tax rates of 0% and 5% would continue to apply regarding interest and dividend payments, respectively, when the beneficial owner or recipient, amongst others, are:
- Certain regulated entities, such as insurance undertakings and pension funds; or
- Listed companies with certain characteristics.
Furthermore, no withholding tax shall be levied on interest payments arising on:
- Government bonds; and
- Listed corporate bonds.
Further details on the exceptions above will be made clear as soon as the full text of the amendment is released upon the signing of the Protocol in the autumn of 2020.
Local Withholding Tax Rates Remain at 0% for Non-Residents
The provisions above notwithstanding, Cyprus shall continue to apply no withholding tax on interest and dividend payments to non-residents of the country as per domestic law.
The Road Ahead
The parties intend to sign the Protocol in autumn 2020. They then expect to ratify the text by the end of the year, and the new provisions should enter into effect from 1 January 2021.
In addition, Mr. Alexey Sazanov, Deputy Finance Minister and State Secretary of the Russian Federation, confirmed at his government is also currently negotiating similar amendments to its bilateral tax treaties with Malta and Luxembourg. The negotiations should conclude by the end of September 2020.
The Russian authorities have also initiated negotiations on similar terms with the Netherlands. The Dutch response is still pending.
In either case, Russia has stated that it intends all double tax treaty amendments to enter into force on the same date, i.e., on 1 January 2021. This position is in keeping with the country's latest fiscal and tax policy aimed at boosting government revenues in a post-COVID economy.
The Bottom Line: What Does That Mean for Cyprus?
The recent agreement on the final version of the Protocol marks the end of a five-month-long period of economic and political uncertainty. The amended provisions give rise to new and potentially lucrative opportunities for Cyprus-based businesses and have the potential to breathe new life into Cypriot-Russian economic relations.
In addition to the special exceptions mentioned above, the Protocol also grants Cyprus several other non-tax concessions. These include:
- Access to EU markets
- Access to international capital markets
- Application of the common law system
- The possibility for the establishment of regional headquarters in the country
The cumulative effect of these measures should be to open up new opportunities for investments in the Russian economy and streamline the carrying out of international monetary transactions through Cypriot entities.
What Does the New Double Tax Regime Mean for You?
Do you have any doubts regarding how the new double taxation regime might affect you and your business?
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