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You are here: Home arrow News arrow New Double Tax Treaty (Cyprus - Russia)
New Double Tax Treaty (Cyprus - Russia)
Sample imageRussia/Cyprus Tax Treaty - Final draft Protocol initialled Cyprus soon to be removed from the Russian "black list"

On 16 April 2009, following a year's intensive meetings and negotiations concluded in a friendly atmosphere of mutual understanding, the governments of the Russian Federation and of the Republic of Cyprus initialled a final draft Protocol to the Double Tax Treaty between the two countries.
As a result of this development, the government of Russia is expected to announce the removal of Cyprus from the Russian “Black List” on the date of signature of the Protocol, such removal coming into effect simultaneously with the provisions of the Protocol.  Formal ratification is expected to happen before the end of 2009 so that the Protocol could come into effect on 1 January 2010.

 As from the effective date of the removal from the black list, dividends received by Russian shareholders from eligible equity participations in Cypriot subsidiaries will be eligible for the Russian Participation exemption.

 As a result of the new agreement, the economic relations between the two countries are expected to be further enhanced and gain even greater momentum in the line with the wishes of the president of the Russian Federation and the president of the Republic of Cyprus, as expressed in their Joint Declaration last November in Moscow.

 1.    Withholding Tax rates – no changes

 One of the most beneficial as well as key aspects of the Tax Treaty is the favourable withholding tax rates applying to cross-border payments of dividend, interest and royalties.
 The business community has welcomed the very positive and important decision not to bring any changes to the current withholding rates which will continue to apply as follows:

 Dividends – 5%Interest – 0%Royialties – 0%

 * The current provision that a direct investment in the capital of the Russian entity of less than USD 100.000 results in a 10% withholding tax rate to apply, is amended such that the 10% withholding tax applies if the direct investment is less than Euro 100.000.

 2.    Distributions from Mutual Funds & Depositary Receipts

 The Protocol clarifies that distributions from Mutual Funds and similar investment will be subject to the normal withholding tax rates applying to dividends i.e. 5%/10%.  This clarifies an uncertainty that existed regarding the withholding tax rates that should apply on such distributions.

 The definition of dividends has also been extended to cover distributions from shares held in the form of Depositary Receipts.

 3.    Changes relating to Interest

 The substantially aligned with the OECD definition of “interest” clarifies, inter alia, that the term “interest” also covers income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits but it does not include penalty charges for late payment or interest which is reclassified as dividends by virtue of other provisions.

 Any interest reclassified by the Russian tax authorities as dividends (e.g. due to Russian thin capitalisation rules) will be subject to the withholding tax rates for dividends.

 4.    Changes relating to Capital Gains, expected to the effective from 2014

 In general, capital gains from the disposal of shares remain under the exclusive taxing right of the country of residence of the seller.

 The important change relates to disposals by a resident of one country of shares of companies which derive a substantial part of their value (more than 50%) from immovable property situated in the other country.  In this particular case, the country in which the immovable property is situated will also have a right to tax the resulting gain.  This change is in line with the OECD Model Tax Convention on Income and Capital.

 The following aspects of this change should be noted:
  •  This change will come into effect four years after the date the Protocol will come in to force i.e. it is expected to be applicable from 2014.
  •  It is understood that the Russian Tax authorities will construe these provisions as applying directly or indirectly to Russian resident taxpayers.
  •  The exclusive taxing right will remain with the country of residence of the seller if:
1. the disposal qualifies as a corporate reorganization or
2. the disposed shares are listed on a recognized stock exchange or
3. the seller is a pension fund, provident fund or the government of either of the two countries
  • The Russian Federation has undertaken that, by the time the Protocol will come into force, it will have adopted the OECD Model Tax Convention on Income and Capital provision for capital gains in its tax treaties with all States which are regarded as main investors in the Russian Federation.

5.    Exchange of information – Assistance in Collection – Mutual Agreement

 This article has been revised in line with the article 26 of the OECD Model Tax Convention on Income and Capital and reflects the changes that have already been introduced in the Cypriot tax legislation since 2008.

 The changes are towards alignment to OECD policy standards on fiscal transparency and exchange of information on taxation matters.

 More clarity has been introduced in relation to the powers and obligations of the tax authorities of the two countries which are generally aimed at improving the administrative procedures through which information can be collected and exchanged between the tax authorities of Russia and Cyprus.

 It now clearly provided that the fact that one country may not need information for its own purposes should not prevent it from collecting this information in reply to a request from the other country.

 At the same time, it also remains clear that information cannot be supplied which is not obtainable under the laws or in the normal course of the administration of a contracting state.

 It is further clearly provided that professional secrecy rules (e.g. by a bank or a person acting in an agency or fiduciary capacity) can not be used as an excuse for refusing to supply information.  However, the circumstances under which such professional secrecy rules can be lifted and the process that must be followed in this respect are subject to the detailed provisions of the domestic legislations of the two countries.

 The article on “Assistance in Collection” has also been aligned to the OECD Model Tax Convention on Income and Capital.  This will come into effect only upon the introduction by Cyprus of the necessary legal framework necessary to provide the Assistance in Collection.

 The amendments to the article on Mutual Assistance procedures are also towards bringing this article in line with the OECD standard.

 6.    Limitation of treaty benefits

 The limitation of benefits introduced does not apply to Russia or Cyprus registered companies.

 Limitation of benefits applies to tax residents of Russia or Cyprus which are not registered companies in either of the two states and only in cases where the tax authorities of the two countries agree that the main purpose or one of the main purposes of the company was to obtain the benefits of the agreement.

 7.    Other changes
  • The Protocol introduces a clarification of the existing “tie-Breaker” clause in relation to residency so that in cases where the effective management cannot be determined, the tax authorities of Russia and Cyprus should consult between them and come to a mutual agreement in this respect.
  • The protocol extends the definition of Permanent Establishment to cover activities of an enterprise resident in one country through services performed by individuals present in the other country for more than 183 days in a 12-month period, with certain specific criteria having to be met prior to such services being deemed to give rise to a Permanent Establishment in the other country.
  • Income from international traffic will be subject to tax in the country where the effective place of management of the person deriving he income is situated.
  • It has been clarified that income of Mutual Funds investing only in immovable property would be treated as ”Income from Immovable Property” as per article 6 of the treaty and may be subject to tax in the country where the immovable property is situated.

 How can HLB Cyprus assist you?

 HLB Cyprus is at your disposal to assist with any queries you may have in relation to the above and help you understand how these changes may affect your enterprise.