Revisions to the Russia – Cyprus Double Tax treaty - Rethinking and Restructuring

As a result of heavily publicised negotiations in August, a protocol amending the long standing double taxation treaty has been signed between Russia and Cyprus (each, a “Contracting State”) on the 8th of September 2020.

 

The crucial features of the amending protocol are the following: -

 

  1. Dividends:

 

Regarding the tax withheld from the Contracting State of which the company paying the dividends is a resident, the protocol sets a limit of 15%, where the beneficial owner of the dividends is a resident of the other Contracting State.

However, the parties have agreed exceptions to the above whereby a 5% withholding tax will apply where the recipient/ beneficial owner of a dividend is also:

 

  • An insurance undertaking or pension fund; or

  • A company whose shares are listed on a registered stock exchange provided that no less than 15% of the voting shares of that company are in free float and which holds directly at least 15% of the capital of the company paying the dividends throughout a 365 day period that includes the day of payment of the dividends; or

  • The Government of that Contracting State or a political subdivision or a local authority thereof; or

  • The Central Bank of that Contracting State.

 

  1. Interest:

 

In relation to interest taxed in the Contracting State in which it arises, if the beneficial owner of the interest is a resident of the other Contracting State, withholding tax shall not exceed 15% of the gross amount of the interest.

Moreover, the interest shall be taxable only in the other Contracting State (not the Contracting State where the interest arises) if:

 

A. The beneficial owner is:

 

  1. An insurance undertaking or a pension fund; or

  2. The Government of that Contracting State or a political subdivision or a local authority thereof; or

  3. The Central Bank of that Contracting State ;or

  4. A bank.

 

or

 

B. The interest is paid in respect of the following securities listed on a registered stock exchange:

 

  1. Government bonds;

  2. Corporate bonds;

  3. Eurobonds.

     

     

There is a significant exception to the above rule in that where the beneficial owner of the interest is a company with the following characteristics:-

 

  1.  whose shares are listed on a registered stock exchange; and

  2. no less than 15% of the voting shares of that company are in free float; and

  3. which holds directly at least 15% of the capital of the company paying the interest throughout a 365 day period that includes the day of payment of the interest

 

the tax charged on such interest by the Contracting State in which arises, shall not exceed 5%.

 

The protocol applies from 1st of January 2021 and shall enter into force on the date of the last notification of the Contracting States of the completion of the procedures required by the domestic law for its entry into force.

 

Significant exemptions to the increased withholding tax rate are crucial and provide for the continued opportunity for tax structuring solutions through Cyprus  - exemptions  granted to corporate bonds, towards various regulated entities, and the continued zero percent WHT rate for royalty payments. It is anticipated that such exemptions will encourage the role of the Cyprus stock Exchange in structures and act as an starter for the Cyprus IP Regime.

 

As mentioned by Mr Petrides, the Minister of Finance, the revised double tax treaty will ensure establishment of regional headquarters in Cyprus, easy access to international capital markets, access to EU markets, and continue to provide opportunities for investments into Russia through Cyprus structures.

 

MPC Legal is on hand to assist clients that take advantage of the double tax treaty are advised to review their corporate structures in light of the above revisions and assess what impact, if any, these will have on their overall effective tax liability and advise on potential restructuring solutions.

 

For further information on this topic please click here. 

 

 

The content of this article is intended to provide general information on the subject matter and does not constitute legal advice. For any further information or assistance, please contact Marilou Pavlou by email at info@mpc.legal.com or by phone at +357 22552727.

 

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