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2020 Double Tax Treaty Russia – Cyprus

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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.         

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Cyprus Changes Tax Treatment of Income from Exploitation of Intangible Assets

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Cyprus companies are used for many different purposes by international investors. They are used as holding companies for investments in foreign subsidiaries, private portfolio investment vehicles, trading activities, supply of services, financing activities, investment fund activities and also for exploitation of intangible assets (intellectual property). 

Income from the exploitation of qualifying intangible assets, including the sale, may, provided that certain conditions are met, be subject to an effective tax rate of 2.5% only, based upon a provision in the Cyprus income tax laws allowing companies receiving such income a deduction equal to 80% of their chargeable profits from such exploitation.

Until recently, Cypriot legislation contained a so-called claw back provision in case of the sale of intangible assets. This provision meant that Cyprus companies had to prepare a balancing statement leading to a clawback of deductions previously claimed with the related tax amortization.

For example;

  • Cyprus company X Ltd acquires an intangible asset at the beginning of year 1 for 100;
  • X Ltd annually deducts amortization costs related to the acquisition for an amount of 5;
  • At the beginning of year 5, after having amortized 20 in the previous 4 years, X Ltd sells the asset for 130;
  • Under the old rules, X Ltd would have to pay corporate income tax over an amount of 50, consisting of 2 elements, one being the difference between the sales price and the acquisition price (130 minus 100) and the other being the clawback of the amortization of 20.  

However, the Cypriot income tax laws have been amended in such a way that in the above example there will not be an obligation to prepare a balancing statement upon the sale of the intangible asset anymore and a clawback of the previously amortized amount (20 in the example) is not required anymore.

So, practically speaking this means a tax relief for companies receiving income from the sale of intangible assets that have claimed amortization in connection with acquisition of these assets in previous years.  

Another change in the laws dealing with taxation of income from exploitation of intangible assets is that any tax amortization capacity not claimed by a Cyprus company in a certain year can be carried forward to future years over the remaining useful economic life of the intangible asset by such company.

The above-mentioned provisions enter into force retroactively as per 1 January 2020.

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Cyprus Kazakhstan double tax treaty enters into force

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On 17 January 2020, the Cyprus-Kazakhstan double tax treaty (hereafter the Treaty) entered into force. The application of the provisions of the Treaty starts as per the beginning of 2021. The Treaty is a welcome addition to Cyprus’ already quite impressive list of treaties with more than 60 countries.

The maximum rates of withholding tax included in the Treaty are as follows; 

  • 15% on dividends in general, but 5% if the beneficial owner is a company, which holds directly at least 10% of the capital of the company paying the dividends;
  • 10% on interest (with certain exceptions for Governmental interest recipients); and;
  • 10% on royalties.

Under the Treaty, gains derived by a resident of a Contracting State from the alienation of (non-listed) shares in the capital of a company based in the other Contracting State, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State, may be taxed in the latter State.

Gains from the sale of shares in other companies may be taxed in the State of residence of the alienator.

Article 29 of the Treaty includes a so-called ‘’principal purpose benefit test’’. Based on this article, a benefit under the Treaty shall not be granted with respect to an item of income if it is reasonable to conclude, taking into account all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted in that benefit, unless it can be demonstrated that granting that benefit in the specific circumstances would be in accordance with the objective and purpose of the relevant provisions of the Treaty.