On 3 August 2020, the Russian Ministry of Finance announced1 that it is ready to terminate the double taxation treaty with Cyprus.2 Despite Russia's attempts to convince Cyprus to raise dividend and interest withholding tax rates (see Legal Alert dated 14 April 2020), the countries have not reached a mutually acceptable agreement yet. If the next round of negotiations, scheduled for August 10-11, fails to produce results, the Treaty could be terminated as early as January 1, 2021.
In parallel, the Ministry is preparing legislation that would limit the ability to apply a “look-through” approach to some Cypriot and analogous conduit structures.
These measures will sharply increase the tax burden on payments to Cyprus, lead to double taxation of certain kinds of income and create the risk of dual tax residency for companies and individuals.
Companies and individuals whose tax structures rely on the Treaty are advised to:
- analyze the implications of the Treaty's termination for entities that make income payments from Russian sources (dividends, interest, royalties, income from the lease or sale of property, etc.);
- consider making the maximum allowed amount of income payments from Russia before the end of 2020;
- look into the possibility of transferring Cyprus companies to other jurisdictions (taking into account Russian and European anti-avoidance rules and rules on the disclosure of information on cross-border transactions3);
- identify and review corporate and contractual structures that the Russian or foreign tax authorities may view as aggressive tax planning schemes;
- consider whether a “look-through” approach may be applied for payments to Cyprus companies, including in cases where the beneficial owner of the income is a Russian tax resident;
- assess the risk that the Treaty's termination may lead to individuals and companies being considered tax residents of both Russia and Cyprus simultaneously, and determine ways to minimize this risk;
- assess the implications of the potential inclusion of Cyprus on the Russian Finance Ministry’s “blacklist”4 after the termination of the Treaty.
If your company decides to change its business structure, review its contractual relationships, or make payments from Russia before the end of 2020, we recommend taking the necessary steps as quickly as possible. That said, we also underscore the importance of complying with Russian law when considering a restructuring, as the Russian tax authorities are likely to regard such changes with increased scrutiny.
1. Press release of the Russian Ministry of Finance.
2. 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 (the “Treaty”).
3. Including the EU Anti-Tax Avoidance Directive (ATAD) and the amended EU Directive on Administrative Cooperation in the Field of Taxation (DAC6).
4. “List of states and territories providing a preferential tax regime and/or not disclosing information when carrying out financial transactions (offshore zones)” established by Order of the Ministry of Finance of Russia No. 108n dated 13 November 2007.