2020 Double Tax Treaty Russia – Cyprus
Cyprus has for decades been one of the biggest investors in Russia and currently is the biggest investor. However, considering Cyprus’ small size one will understand that the vast majority of investments into Russia that are labelled as ‘’investments from Cyprus’’ are in fact investments through Cyprus. To be more specific, the vast majority of the investments is made through holding companies based in Cyprus, set up by third country investors (or investors from Russia, see hereafter).
There are various reasons why investments are made through Cyprus companies.
First of all, Cyprus has a favorable double tax treaty (hereafter the DTT) with Russia. The DTT among others provides for a reduction of withholding tax over dividends paid by Russian companies to Cyprus companies, to 5% only (Russia’s domestic withholding tax rate for dividends is 15%), provided certain conditions are met. The DTT also provides for a reduction of withholding tax over interest paid by Russian companies to Cyprus companies to 0%, provided certain conditions are met (Russia’s domestic withholding tax rate for interest is 20%).
Furthermore, Cyprus has a very favourable tax regime for holding companies based in this country. Income (dividends and capital gains) generated by holding companies in Cyprus is generally exempt from tax. Moreover, dividend distributions made by Cyprus holding companies to foreign shareholders are not subject to any (withholding) tax in Cyprus.
What is important for Russian investors (who also frequently own investments in their Russian businesses through Cyprus holding companies) is that Cyprus has an independent Court system with proper dispute resolution mechanisms and that it is a politically stable country, including EU Membership.
As a measure to address the economic impact of the coronavirus (COVID-19) pandemic, Russia has recently managed to persuade Cyprus to change the DTT. Russia simply wants to increase revenue from withholding tax over dividend payments from Russia to Cyprus (and other dividends).
Under the revised treaty, which is supposed to enter into force as per 1 January 2021, Russia will in principle be allowed to levy withholding tax over dividends paid by Russian companies to Cyprus residents at a rate of 15% (apart from a few exceptions). Russia will also be allowed to levy 15% withholding tax over certain interest payments from Russia to Cyprus.
What is important is that Russia has also persuaded other countries that are popular platforms for investments into Russia, namely Malta and Luxembourg, to agree on similar revised conditions in their double tax treaties with Russia as the new conditions in the Russia-Cyprus double tax treaty. Russia is also awaiting an official response from the Netherlands to a proposal to renegotiate the double tax treaty between the Netherlands and Russia. If the Netherlands agrees to negotiate, it will be offered the same conditions in a new treaty as Cyprus.
The above means that a level playing field is maintained for Cyprus in its competition with other jurisdictions, to remain the preferred platform for investments into Russia. It is also important for investors to know that the looming threat of cancellation of the treaty by Russia has disappeared. Finally, investments into Russia via Cyprus may be protected against a possible future increase of Russian dividend withholding tax, since Russia may under The DTT not be allowed to levy withholding tax at a higher rate than 15%, which is Russia’s current domestic rate.