The Russian Finance Ministry issued a press release in which it announced the denunciation of DTA with Cyprus. The Ministry explained the termination of the agreement by the fact that the proposals of the Cypriot side did not provide the necessary economic effect for Russia.
July 30, 2020. Cyprus President Nikos Anastasiadis held telephone conversations with Russian President Vladimir Putin. He tried to persuade the Russian side not to change the DTA, but the attempt was unsuccessful. The outcome of the negotiations was reported by representatives of the Cypriot government.
The main topic of the negotiations was the increase in taxes in favor of Russia for Russian companies operating in Cyprus. Vladimir Putin gave previous arguments that additional taxation is necessary to improve Russia’s economic performance.
As a result of telephone conversations, it was decided to hold another discussion in August. The negotiators on the Cyprus side proposed exceptions to the new scheme. It was proposed to exempt from tax increases:
- state enterprises,
- companies whose shares are traded on the exchange,
- organizations, controlled by investment groups.
According to the Russian side, the proposed number of exceptions is too large. As a result, Moscow refused to hold face-to-face negotiations.
Termination of the DTA between Russia and Cyprus
Rising taxes will affect Russian companies that do business with Cyprus. Thus, the Russian government protocol to the government of Cyprus on March 31, 2020 increased the tax on dividends and interest to 15%. According to the current DTA, companies pay 0% on interest and 5-10% on dividends.
The new version of DTA will be signed in September during the visit of Russian Foreign Minister Sergei Lavrov to Cyprus. The changes will come into force on January 1, 2021.
How will Russian business react to the termination of DTA
Several Russian companies will be affected by the new DTA. It is likely that some of them will change their jurisdiction within the EU borders – for example, to Switzerland, Austria, Latvia or the Netherlands. Others will move back to Russia to spend less on taxes.
The option to stay in Cyprus and pay 15% will also be popular. It is completely legal, does not imply additional costs or illegal schemes.
In addition, Russian legislation now allows for a reduction in tax on accumulated profits in controlled foreign corporations (CFC). The business has a choice: report and pay 13% or pay a fixed amount of 5 million rubles without reporting.
Other countries with which Russia is repealing DTA
Russia changes or terminates DTA with countries from which money is often transferred to offshore locations. Cyprus, Luxembourg and Malta were in the top 3 – the governments of these countries received protocols from Russia in March-April 2020. In the future this may affect other respectable jurisdictions, where Russians prefer to keep funds.
The Russian Federation Ministry of Finance has already prepared an agreement on dissolution of DTA with Malta. If it is signed, from January 1, 2020 the tax rates for dividends, interest and royalties, which Russian companies transfer to Malta, will increase to 15-20%.
In the opinion of our lawyers, the popularity of Malta and Cyprus citizenship investment programmes will not be affected by the termination of agreements or changes in their terms. First and foremost, passports of these countries are issued to enable them to live, work and study in any EU country.
Earlier we told that by the end of 2019 Cyprus and Malta became leaders among the countries where Russians become tax residents. But Russian citizens prefer to open accounts in Switzerland and the UK, less often – in Cyprus.
Cyprus is changing the DTA with other countries. Thus, the country has recently concluded an agreement to amend the agreement with Switzerland. The amendments implement the standards of the BEPS plan, which is aimed at combating tax evasion.