The RF Ministry of Finance has begun to terminate the double taxation agreement with the Republic of Cyprus. The agreement does not make it possible to increase taxes on dividends and interest for Russian residents to 15%, and the Russian side also believes that the proposals of Cyprus contribute to capital flight from the Russian Federation.
“To fulfill the instructions of the President of the Russian Federation on taxation of income in the form of dividends and interest paid from the territory of the Russian Federation to the Republic of Cyprus at a rate of 15%, the Ministry of Finance of Russia on August 3 this year begins the procedure for denouncing the Agreement,” website ministries.
The current agreement with Cyprus allows to reduce the rate on dividend payments to Cyprus to 5 or 10%, and on interest on loans – to 0%. The Ministry of Finance of the Russian Federation proposed to the Cypriot side to raise rates to 15% on both dividends and interest. However, Cyprus has put forward its proposals, which, according to the Ministry of Finance, “dilute and make unattainable” the intended effect of supporting the national economy and social programs, and will also contribute to the tax-free withdrawal of money from the territory of the Russian Federation. As a result, it was decided to withdraw from the agreement with Cyprus.
The Ministry of Finance of Cyprus reported RIA Novostithat they have not yet received notifications from their Russian colleagues and are “on hold,” being optimistic. According to the Cyprus Ministry of Finance spokesman, breaking the agreement will not be positive or beneficial for either of the two countries, and taxation will be regulated arbitrarily, negatively affecting investor confidence.
“Our attitude is not to bring the agreement to a break, so we are negotiating with the Russian side to find a fair solution that will help both countries,” said a representative of the Cyprus Ministry of Finance. According to her, Cyprus initially proposed to extend the agreement, but this proposal was not accepted by the Russian side.
On March 25, Russian President Vladimir Putin, in his address to the Russians, proposed to establish a tax for the withdrawal of dividends to offshores in the amount of 15%… The same percentage is charged from individuals – non-residents in Russia. This money will go to support the unemployed and families with children.
To this end, the head of state instructed to amend agreements on the avoidance of double taxation with some countries, starting with those through which significant resources of Russian origin pass. During the period of the Russian-Cypriot agreement, many Russian companies have used this jurisdiction. According to the website of the Ministry of Finance of the Russian Federation, more than 1.4 trillion rubles were withdrawn to Cyprus in 2018, and more than 1.9 trillion rubles in 2019. As noted by the Deputy Minister of Finance of the Russian Federation Alexei Sazanov, who is quoted by TASS, after the denunciation of the agreement, the restructuring of holdings through Cyprus will become unprofitable, and it will be more profitable to transfer these structures back to Russia.