Cyprus and Russia agree to amend Double Tax Treaty

The Republic of Cyprus and the Russian Federation reached agreement, on 10 August 2020, for a revised protocol to the Cyprus Russia Double Tax Treaty after extensive negotiations. The deal ended a period of uncertainty following Russia’s request on 1 April to amend the treaty, which was backed up by its threat of unilateral revocation.

Under the Protocol, which is scheduled to be signed in September, the withholding tax on dividends and interest paid from Russia to Cyprus will increase to 15%, with certain exemptions in respect of regulated entities and certain types of interest on corporate bonds, government bonds and Eurobonds, as of 1 January 2021. The withholding tax on royalty payments will remain at 0%.

The Russian side confirmed the termination of the process to revoke the treaty. At the same time, it confirmed that the same rates of withholding tax will also be applied to agreements that Russia has concluded with other treaty partners and with the same effective date of 1 January 2021. In addition to Cyprus, letters to request an increase of withholding tax rates on dividends and interest to 15%, were also sent to Malta, Luxembourg and the Netherlands, and will be sent to other countries as well.

“This creates the potential for a level playing field,” said Evgenios Evgeniou, president of the Cyprus Russian Business Association. “The intention of the Russian side is for changes in the treaties with all countries to be effective as of 1 January 2021.

“The position of our Association from the start was that we should continue to have in place an effective treaty with the Russian Federation and that Cyprus should not find itself at a disadvantage compared to other European countries. The conclusion of the matter broadly satisfies these objectives.”

The Cyprus Ministry of Finance said that “maintaining the existing network of Double Taxation Agreements is a priority for the government, and therefore updating them in the face of changing international conditions is imperative”.

Russia’s Ministry of Finance also expressed its satisfaction, saying: “Additional revenues to the Russian budget from the increase in the tax on dividends by Cyprus will amount to RUB130-150 billion annually.”

“The fact that similar provisions will apply to other countries with which Russia has concluded similar treaties, and from the same date that they will apply to Cyprus, should ensure a fair approach for all affected jurisdictions,” said George Ayiomamitis, Managing Director of Sovereign Trust (Cyprus) Ltd.

“From a tax planning perspective, the provision for zero withholding tax on royalties paid from a Russian to a Cyprus company remains. This means that the Cyprus Intellectual Property (IP) Box regime, with a maximum effective tax rate of 2.5%, will still be highly attractive for Russian businesses involved in the acquisition or development of IP assets.”

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