20 November 2020

 

Uncertainty over the Double Tax Treaty between the Russian Federation and the Republic of Cyprus has been finally put to an end with the signing of an amending protocol on the 8th of September 2020 between the two countries.

The amendments introduced by the 8th September protocol were a result of successfully concluded negotiations in August between the two countries, following proposals by the Russian Federation to review the minimum withholding tax (which it had also made to other financial centres, such as Malta, Luxembourg and the Netherlands, however the latter not yet coming into an agreement with the Russian Federation in this respect).

Effectively, the amendments introduced mean that from 1 January 2021, dividends paid to beneficial owners resident in the other contracting state will be taxed at no more than 15 percent of the gross amount, rather than 5 or 10 percent previously applicable, however, with exemptions in the case of regulated entities such as listed entities, insurance companies and pension funds of one of the contracting states, in which case the 5 percent rate shall continue to apply.

Similarly, as from 1 January 2021 withholding tax on interest payments made to beneficial owners of the other contracting state will be subject to a withholding tax rate not exceeding 15 percent, however, again with exemptions in the case of interest payments from corporate and government bonds as well as Eurobonds, which will be taxed at the lower 5 percent rate.

Finally, it should be noted that the withholding tax rate for royalty payments remains unaltered to zero percent.

Concluding, though the protocol effectively increases the minimum outbound withholding tax in respect of dividends and interest, Cyprus remains an attractive jurisdiction for institutional and regulated businesses, in view of the exemptions. Further, for other businesses too, the Double Tax Treaty between the Republic of Cyprus and the Russian Federation not being the only factor for relocating in Cyprus. Cyprus having a legal system closely aligned with English common law system, affording a high degree of asset protection, low operational costs and corporate tax related incentives are only some of the advantages to be considered. Finally, and probably most importantly, the certainty that has been created with the signing of the 8th September protocol, which ensures the continuation of the implementation of the double taxation avoidance treaty.

The revised by the 8th September protocol Double Tax Treaty between the Russian Federation and the Republic of Cyprus becomes effective from the 1st of January 2021.

Businesses in Cyprus that will be subject to the protocol are advised to review their corporate structures and assess what impact, if any, the changes introduced by the 8th September amending protocol will have on their overall effective tax exposure.