Russia: New protocol to Russia-Cyprus tax treaty increases tax rates

In brief

Russia and Cyprus signed a protocol to their tax treaty1 to increase withholding tax rates up to 15% on dividends and interest payments.2 The new rates will apply as of 1 January 2021 and will affect most of the existing holding structures involving Cypriot companies.


Contents

The following benefits have been retained, however:

  • 5% dividend withholding tax for public companies with at least 15% of shares in free float, subject to the minimum 15% direct shareholding requirement and the minimum 1-year holding period;
  • 5% reduced withholding tax on interest received by the above public companies;
  • 0% withholding tax on interest received by banks, pension funds and insurance companies;
  • 0% withholding tax on interest received by issuers of Eurobonds.

These amendments will likely serve as a basis for renegotiating tax treaties with other jurisdictions. The Russian Ministry of Finance has sent official notices to Luxembourg, Malta, the Netherlands, Hong Kong, and Switzerland. Corporate groups affected by these initiatives may need to consider restructuring to remain tax efficient.

The Ministry of Finance is promoting new legislation limiting the 0% tax rate on dividends paid to foreign intermediary companies (including those recognized as Russian tax residents), whose beneficiaries are Russian companies. But there is another legislative proposal to retain the 0% tax rate in 'look-through' structures. We expect that this collision will be resolved in the autumn-winter parliamentary session.

Practical considerations

We recommend that companies and individuals whose tax structures rely on the tax treaty with Cyprus:

  • review the implications of the upcoming increase in dividend and interest withholding taxes and consider restructuring measures;
  • consider accelerating income payments from Russia under the current reduced withholding tax rates;
  • assess business benefits and synergetic effects of having a holding company in Russia or in a foreign jurisdiction retaining a favorable tax treaty with Russia (taking into account Russian and European anti-avoidance rules and rules on the disclosure of information on cross border transactions3);
  • consider further increasing substance and listing Cypriot companies to retain reduced withholding tax rates (IPO/SPO);
  • review corporate and contractual structures (not only with connection to Cyprus) that Russian or foreign tax authorities may view as aggressive tax planning schemes.

As restructuring steps may take considerable time to implement, international groups should prepare well in advance, especially considering delays which may be caused by remote work or other factors.

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1. Agreement between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, signed 5 December 1998.

2. Press release of the Russian Ministry of Finance from 8 September 2020.

3. Including the EU Anti-Tax Avoidance Directive (ATAD) and the amended EU Directive on Administrative Cooperation in the Field of Taxation (DAC6).


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