Cyprus and Russia entered into a Double tax Treaty (DTT) back in 1998 in a joint effort to avoid the double taxing of income and capital generated in Cyprus.
Currently, applicable rates on dividends vary from 5% to 10%, depending on fulfilment of various investment criteria. While in regards to interest, cross-border interest payments are exempt from withholding tax under DTT.
On the 25th of March 2020, President Putin introduced numerous measures in an attempt to tackle the economic challenges which were brought by the coronavirus pandemic. Amongst the measures, he announced the Russian Federation's intentions to amend the DTTs that are currently in place with various countries, such as Cyprus, Malta, Luxemburg and the Netherlands. President Putin requested from the Cyprus Minister of Finance for negotiations to commence in order to amend article 10 (dividends) and article 11 (interest) of the Cyprus-Russia DTT.
On the 08th of September 2020 the Republic of Cyprus and the Russian Federation announced that they had concluded on the amendments of the DTT between the two countries. The protocol approved that all dividend and interest payments made from Russia to Cyprus will be subject to 15% withholding tax. However there are a number of exceptions in regards to both dividends and interests. The exceptions are explained in detail below:
The two countries have agreed on a 0% withholding tax on interest payments if the beneficial owner is one of the below:
- An insurance undertaking or a pension fund;
- The Central Bank or any other banking institution;
- The Government, a political subdivision or a local authority;
In addition to the above, no withholding tax will be applied on interest earned in any of below listed bonds:
- Corporate bonds
- Government bonds
The two parties have agreed that a 5% withholding tax will apply where the recipient/ beneficial owner of a dividend is:
- The Central Bank;
- A regulated financial institution, an insurance company or a pension fund;
- The Government or a political subdivision or a local authority;
- A company whose shares are listed on a registered stock exchange (subject to conditions)
FOREIGN TAX CLAIM
Cyprus Tax Law allows for a tax credit on foreign tax that is paid outside of Cyprus. A tax credit can be claimed on withholding tax, given that the income on which tax was paid on, is income that is taxable in Cyprus as well.
For example, withholding tax of 15% that will be paid on interest income from Russia will be able to be claimed as a foreign tax credit in Cyprus, since interest income is taxable in Cyprus as well. Foreign tax credit is limited to the maximum of the amount of tax that would had been payable in Cyprus on that specific income. Foreign tax credit is fixed up to the point that it will not form a tax loss and can only be used in the same tax year.
On the other hand, a Cyprus company receiving dividends from Russia that will be subject at a withholding tax of 15% (given no exemptions), will not be able to claim any foreign tax credit in Cyprus, since dividend income is not taxable in Cyprus.
In regards to royalties, any payment of royalties from Russia to Cyprus will continue to be exempt from withholding tax. This is beneficial considering the tax benefits of the Cyprus IP Box Regime.
Furthermore, it is important to note that in the event in which a Cyprus company makes any payments of interest, dividends or royalties, (given IP is not used), to a foreign individual, these payments remain exempt from any withholding tax under the provisions of the current Cyprus tax system.
Russia has also announced revised withholding tax rates with Malta and Luxembourg, in order to ensure level playing field amongst its European Partners. Malta and Luxembourg have agreed to amend DTTs with Russia and tax rates on interest and dividends from Russia will increase to 15%. It is Russia's intentions for these countries to have the same effective date as with Cyprus.
It is the intention of both countries for the Protocol agreed on to be effective and applicable from the 1st of January 2021.
The protocol announced tightens the relationship between the Cyprus and Russia and ensures a continuation of the economic relations between the two countries.
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.