In April 2009 after intensive negotiations at a high level a new protocol to the Cyprus-Russia Double Tax Treaty (“protocol”) has been signed between the two counties. As it was stated in the protocol its aim was to address speedily and effectively the issue of most concern to both countries mainly:
For Cyprus
- the removal of Cyprus from the list of countries with preferential tax regimes in the Russian Federation. Although by many the inclusion of Cyprus in the so called Russian black tax list is symbolic since it is estimated that 90% of the Cyprus – Russia business is inbound into Russia and therefore is not effected from the black list it was feared by Cyprus officials that it would lead to similar moves by other countries and therefore it was in the high interest of Cyprus that the matter be resolved speedily.
For Russia
- the exchange of information as per the latest OECD model tax convention, limitation of benefits and the disposal of shares relating to immovable property.
Overall the protocol is viewed by the financial community to be very beneficial to international business and one that should foster further the economic relations between the two countries by removing the uncertainty surrounding the future of the treaty which lasted over almost 1 year and clarifying certain matters in the existing treaty. As a result it is viewed that Cyprus shall remain as one of the most favorable routes for investments into the Russian Federation. Below we list a summary of some of the most important changes introduced by the protocol.
Dividends, Interest, Royalties:- Generally unchanged
The existing withholding taxes for dividends, interest and royalties have remained the same; the only change is the condition for eligibility for the lower 5% withholding tax rate for dividends which is now changed to Euro 100.000 from USD100.000. The nil withholding tax rates on interest and royalties remain the same.
The dividends and interest definition have been changed to align them with the latest OECD model treaty definitions. The definition of dividends now include income even paid in the form of interest and payments on shares of mutual investment funds and similar collective vehicles, as well as depositary receipts over shares.
It is perceived that the new definitions will enable the Russian tax authorities to tax excessive interest payments by reclassifying them to dividends under domestic thin capitalizations rules and tax them at source albeit at the reduced dividend treaty tax rates not previously possible as interest is subject to nil withholding tax rates.
Gains from the sale of shares: - An important change
This is one of the most important changes introduced by the protocol as a result of which gains from the sale of shares deriving more than 50% of their value from immovable property situating in the other contracting country (for example Russia) may be taxed in the country where the immovable property is situated (i.e. Russia). This amendment of course is of course of most concern to Cypriot companies selling shares in Russian property rich companies. There are certain exemptions to this new rule which include pension funds, provident funds, listed companies, corporate reorganizations and the Government of a contracting state.
Although this is a negative development for Cyprus the good news are that, as provided in the protocol, this amendment is not expected to apply until January 1st 2014.
Limitation of benefits: – of limited effect
The newly introduced limitations of benefits articles is aimed to dis-apply the benefits of the treaty in certain situations.
Although on a first reading the article appears to be very disadvantageous, the way the article has been drafted, it appears that the limitation of benefits would not apply in practice for the cases were the relevant companies seeking the benefits are incorporated or registered companies either in Russia or Cyprus i.e. the preponderance of the cases.
Further, even in the cases the article does seem to apply, its application shall not be automatic, but rather, it offers a mechanism to attack perceived treaty abuses and only as a result of prior consultations between the tax authorities.
In any event it is perceived that the limitation of benefits would apply mostly to companies incorporated outside Cyprus but which are tax resident in Cyprus because their management and control is exercised from within Cyprus and therefore we feel shall have a limited effect.
Other changes
Ship and aircraft profits
The Russian proposal to replace the residence test with the place of effective management is not unusual. Many other Cyprus bilateral treaties adopt the place of effective management. The residence test is much easier to prove. The place of effective management, if disputed, will have to be resolved through the Mutual Agreement Procedures.
Mutual Agreement Procedures
These changes (substitution of paragraphs 1 and 4) may not really affect foreign investments.
Exchange of information
This is based on the 2005 OECD update of the Model Tax Convention. Cyprus has already taken legislative steps to be in a position to be able to satisfy the Russian side in the field of the supply of information. By taking theses steps, Cyprus has been put in the list of countries which are in line with the exchange of information requirements of the OECD. On the other hand, both the protocol and Cyprus domestic legislation provide certain safeguards for the correct application of the exchange of information.
Assistance in Collection
This is an OECD Article. The Cyprus side agreed to take steps in enacting the necessary legislation in order to enable the competent authority to provide assistance in the collection of taxes.
Duel resident companies
Under the existing treaty, for the purpose of the definition of “resident” (other than an individual), residence is determined by the entity’s place of effective management. A new paragraph is added by the Protocol with the objective of making the ‘tie-breaker test’ more effective so that where the place of effective management of such a person cannot be determined, the Russian and Cypriot tax authorities shall endeavor to determine this by mutual agreement.
Permanent establishment
The meaning of permanent establishment is extended to allow for the taxation of profits from services performed in one country by an entity of the other country through and individual or individuals present in the other country for more than 183 days in a 12-month period in certain circumstances.
For further information please contact us at +357 25 274050 or info@cyplaw.com.
This material has been prepared by professionals of Clerides, Anastassiou, Neophytou LLC. It is intended as a general guide only, and its application to specific situations will depend on the particular circumstances involved. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This information should not be relied upon as a substitute for such advice. While all reasonable attempts have been made to ensure that the information contained herein is accurate, Clerides, Anastassiou, Neophytou LLC accepts no responsibility for any errors or omission it may contain or any opinions contained herein whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies upon it.
Clerides, Anastassiou, Neophytou LLC provides corporate and commercial legal services, to public and private international and local clients spanning multiple industries. Please visit our internet site at www.cyplaw.com for a full description of our services and representative transactions.
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior permission of the publisher.
For Cyprus
- the removal of Cyprus from the list of countries with preferential tax regimes in the Russian Federation. Although by many the inclusion of Cyprus in the so called Russian black tax list is symbolic since it is estimated that 90% of the Cyprus – Russia business is inbound into Russia and therefore is not effected from the black list it was feared by Cyprus officials that it would lead to similar moves by other countries and therefore it was in the high interest of Cyprus that the matter be resolved speedily.
For Russia
- the exchange of information as per the latest OECD model tax convention, limitation of benefits and the disposal of shares relating to immovable property.
Overall the protocol is viewed by the financial community to be very beneficial to international business and one that should foster further the economic relations between the two countries by removing the uncertainty surrounding the future of the treaty which lasted over almost 1 year and clarifying certain matters in the existing treaty. As a result it is viewed that Cyprus shall remain as one of the most favorable routes for investments into the Russian Federation. Below we list a summary of some of the most important changes introduced by the protocol.
Dividends, Interest, Royalties:- Generally unchanged
The existing withholding taxes for dividends, interest and royalties have remained the same; the only change is the condition for eligibility for the lower 5% withholding tax rate for dividends which is now changed to Euro 100.000 from USD100.000. The nil withholding tax rates on interest and royalties remain the same.
The dividends and interest definition have been changed to align them with the latest OECD model treaty definitions. The definition of dividends now include income even paid in the form of interest and payments on shares of mutual investment funds and similar collective vehicles, as well as depositary receipts over shares.
It is perceived that the new definitions will enable the Russian tax authorities to tax excessive interest payments by reclassifying them to dividends under domestic thin capitalizations rules and tax them at source albeit at the reduced dividend treaty tax rates not previously possible as interest is subject to nil withholding tax rates.
Gains from the sale of shares: - An important change
This is one of the most important changes introduced by the protocol as a result of which gains from the sale of shares deriving more than 50% of their value from immovable property situating in the other contracting country (for example Russia) may be taxed in the country where the immovable property is situated (i.e. Russia). This amendment of course is of course of most concern to Cypriot companies selling shares in Russian property rich companies. There are certain exemptions to this new rule which include pension funds, provident funds, listed companies, corporate reorganizations and the Government of a contracting state.
Although this is a negative development for Cyprus the good news are that, as provided in the protocol, this amendment is not expected to apply until January 1st 2014.
Limitation of benefits: – of limited effect
The newly introduced limitations of benefits articles is aimed to dis-apply the benefits of the treaty in certain situations.
Although on a first reading the article appears to be very disadvantageous, the way the article has been drafted, it appears that the limitation of benefits would not apply in practice for the cases were the relevant companies seeking the benefits are incorporated or registered companies either in Russia or Cyprus i.e. the preponderance of the cases.
Further, even in the cases the article does seem to apply, its application shall not be automatic, but rather, it offers a mechanism to attack perceived treaty abuses and only as a result of prior consultations between the tax authorities.
In any event it is perceived that the limitation of benefits would apply mostly to companies incorporated outside Cyprus but which are tax resident in Cyprus because their management and control is exercised from within Cyprus and therefore we feel shall have a limited effect.
Other changes
Ship and aircraft profits
The Russian proposal to replace the residence test with the place of effective management is not unusual. Many other Cyprus bilateral treaties adopt the place of effective management. The residence test is much easier to prove. The place of effective management, if disputed, will have to be resolved through the Mutual Agreement Procedures.
Mutual Agreement Procedures
These changes (substitution of paragraphs 1 and 4) may not really affect foreign investments.
Exchange of information
This is based on the 2005 OECD update of the Model Tax Convention. Cyprus has already taken legislative steps to be in a position to be able to satisfy the Russian side in the field of the supply of information. By taking theses steps, Cyprus has been put in the list of countries which are in line with the exchange of information requirements of the OECD. On the other hand, both the protocol and Cyprus domestic legislation provide certain safeguards for the correct application of the exchange of information.
Assistance in Collection
This is an OECD Article. The Cyprus side agreed to take steps in enacting the necessary legislation in order to enable the competent authority to provide assistance in the collection of taxes.
Duel resident companies
Under the existing treaty, for the purpose of the definition of “resident” (other than an individual), residence is determined by the entity’s place of effective management. A new paragraph is added by the Protocol with the objective of making the ‘tie-breaker test’ more effective so that where the place of effective management of such a person cannot be determined, the Russian and Cypriot tax authorities shall endeavor to determine this by mutual agreement.
Permanent establishment
The meaning of permanent establishment is extended to allow for the taxation of profits from services performed in one country by an entity of the other country through and individual or individuals present in the other country for more than 183 days in a 12-month period in certain circumstances.
For further information please contact us at +357 25 274050 or info@cyplaw.com.
This material has been prepared by professionals of Clerides, Anastassiou, Neophytou LLC. It is intended as a general guide only, and its application to specific situations will depend on the particular circumstances involved. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This information should not be relied upon as a substitute for such advice. While all reasonable attempts have been made to ensure that the information contained herein is accurate, Clerides, Anastassiou, Neophytou LLC accepts no responsibility for any errors or omission it may contain or any opinions contained herein whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies upon it.
Clerides, Anastassiou, Neophytou LLC provides corporate and commercial legal services, to public and private international and local clients spanning multiple industries. Please visit our internet site at www.cyplaw.com for a full description of our services and representative transactions.
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior permission of the publisher.
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