Many people are aware that recently Russian Federation has officially approached Cyprus to review its tax law policy. What is the essence of the request, what are the prospects for its implementation and what Cypriot authorities think about it? We shall analyse this situation in the article below.
Changes proposed by the Russian Federation
Currently, Russian entrepreneurs who own their enterprises through Cypriot holding companies pay 5% withholding tax (“WHT”) to the Russian treasury on distributed dividends and no tax on interest on loans advanced from Cyprus entities. The notification sent by Russian authorities to Cypriots includes a request to increase WHT on both, the first and the second case to 15%. And only under certain conditions to allow WHT on dividends to be 10%.
Cyprus position regarding the request and its view of the situation
At first glance, it might seem that these changes could not be in favour of Cyprus. The Russian treasury will have to receive more tax profits than before. In other words, the actual profit of the entrepreneur will be less than it was. And this may be a trigger for consideration of closing the holding, which is not in favour of Cyprus at all. Won’t the Russians who have a holding in Cyprus look for other countries to establish a base, in order to avoid paying taxes at a higher rate? That could be the main question. Of course, we can only be sure once Cyprus adopts the changes the Russian Federation is insisting on. Therefore, at the moment the issue is under discussion and consideration.
However, there is no doubt that the Russian Federation will send notifications with similar requests to other countries as well, e.g. the Netherlands, Luxembourg, Malta and other popular jurisdictions among Russian entrepreneurs.
Thus, theoretically, it can be assumed that in all countries where Russian residents maintain holdings, the level of taxation on the above mentioned transactions will be approximately at the same level, although Cyprus still has an advantage, due to the national tax law, allowing to exempt received dividend income from taxation. However, if the request of the Russian Government is satisfied, the competitiveness of Cyprus tax legislation will be limited.
The proposals that Cyprus wants to bring up for the negotiation
First of all, the Cypriot side wants to propose that the new double taxation treaty with Russia should include a most favoured nation clause, which would ensure that the tariffs applied in the convention are the lowest available, giving Cyprus a tax advantage.
In addition, it is proposed to identify the types of companies that will be subject to the new tax legislation. Namely, Cyprus is interested that these should be local companies, at least 25% of which are owned by individuals who are residents of the Russian Federation.
It will also make the taxation of the convention with Cyprus more competitive. And, if a Russian resident will own, let’s say, 20% of the shares of a local company, the changes in legislation will not apply to it. Meaning that the tax rates will remain the same.
It is also in the interest of the Cypriot authorities that specific companies and foundations are exempt from paying taxes at the new higher rates requested by the Russian Federation. A list of these companies and foundations will be included in the package of proposals put forward by the Cypriot side.
A short summary
On a general note, it may be observed that Cypriot authorities are positively tuned towards responding to the request of the Russian Federation. However, as the case is serious enough, it requires discussion, debate and consideration of options before a response can be provided that will satisfy both parties.
In addition to the proposals directly aimed at changing the double taxation treaty between Cyprus and Russia, as we wrote above, Cypriot authorities are also considering the proposal of certain changes to local tax laws.
In particular, the question is about reviewing the requirements that must be met in order to obtain a document confirming tax residency. As well as the imposition of income tax on transactions made to countries that Cyprus has got no double tax treaty agreement with. In addition, the topic of granting tax credit in respect of taxes that have been paid abroad is also under consideration.
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