Russia terminates the Agreement on avoidance of double taxation with Cyprus

"The main offshore of Russia" stops working?

Cyprus is a very popular country for structuring international business. Especially Cyprus, with its low taxes for local companies and trusts to preserve confidentiality, businessmen from the CIS like to use. Cyprus is often a connecting link through which capital is transferred from CIS countries to offshore and back. In particular, according to the Central Bank of Russia in 2019, Russia invested $14.5 billion in Cypriot companies, and received $8.1 billion in direct investments.

Such a serious popularity of Cyprus has always been promoted by the favorable terms of double taxation agreements, but this may soon change! In his speech of 25.03.2020, the President of Russia mentioned the need to abolish preferential tax rates for those who withdraw their income in the form of dividends to foreign accounts, and this statement will directly affect the agreement with the Russian Federation with Cyprus. Let's take a closer look at the reasons for the upcoming changes:

According to the current legislation, the tax rate on dividends in favor of foreign organizations is 15%, on interest on loans submitted from abroad - 20%. However, within the framework of double taxation agreements, it is possible to legally reduce the payment of dividends in favor of residents of Cyprus from Russia to 5 or 10%, and interest on loans to 0%.

In April, Russia proposed to Cyprus to cancel all tax benefits on dividends and interest paid to this country. Cyprus did not agree to this, offering to maintain the current rates, promising to tighten control over foreign structures of Russian business at the same time.

Breaking the agreement threatens to increase tax costs even more than its revision. Russian businesses working with offshore companies through Cyprus face not only a sharp increase in the tax burden, but also double taxation. First of all, the burden on royalties paid to Cyprus will increase dramatically. It was not proposed to raise the tax rates with royalties in the agreement, but without an agreement they will amount to 20%. The owners of patents and trademarks, who now transfer them under license agreements, will suffer. In addition, you will have to pay a tax on interest on loans at a rate of 20%, not only in Russia, but also in Cyprus (where the rate on these taxes is 12.5%).

Also, Russian companies receiving dividends from Cypriot subsidiaries will not be able to take advantage of the preferential zero rate (if a Russian company has owned more than 50% of the Cypriot one for more than a year) and will have to pay a tax on such dividends of 13%.

The absence of an agreement with Cyprus may lead to the inclusion of the country in the black lists of the Russian Ministry of Finance and the Federal Tax Service (FTS). Because of this, the tax burden on the owners of controlled foreign companies (CFC) in Cyprus may increase. If the effective rate at which the CFC pays tax abroad is not much lower than the Russian one (at least 75% of the weighted average rate), there is no need to pay tax in Russia. But if the CFC works in a country from the black list of the Federal Tax Service, you will have to pay the tax anyway.

Antwort Law specialists will conduct an expert examination of your business, check the SOID for the presence of hidden taxes and payments, and also help you optimize your taxes. The Antwort team will be happy to confirm your tax residency and help you obtain a tax certificate in the country of registration of your business.

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