Russia surprises Cyprus by exiting double taxation agreement

The Ministry of Finance of the Russian Federation has launched the process 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 percent. Russia also believes that proposals from Cyprus contribute to capital flight from the Russian Federation.

"To fulfill the instructions from the President of the Russian Federation on the taxation of income in the form of dividend and interest paid from the territory of the Russian Federation to the Republic of Cyprus at a rate of 15 percent, the Ministry of Finance of Russia, starting from August 3 of this year, launches the procedure for denouncing the agreement," the message posted on the website of the ministry said.

The current agreement with Cyprus allows to reduce the rate on dividend payments to Cyprus to 5 or 10%, and interest on loans - to 0%. The Ministry of Finance of the Russian Federation offered Cyprus to raise rates to 15% on both dividends and interest. However, Cyprus put forward its own proposals, which, according to the Ministry of Finance, "erode 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.

Representatives of the Cypriot Ministry of Finance said that they have not yet received notifications from their Russian colleagues. According to the spokesperson for the Ministry of Finance of Cyprus, the termination of the agreement will not be either positive or beneficial for either of the two countries, while taxation will be regulated arbitrarily, showing negative influence on investor confidence. Cyprus initially proposed to extend the agreement, but Russia did not accept the proposal, Cypriot officials said.

On March 25, Russian President Vladimir Putin, in his address to the nation, proposed setting a tax for the withdrawal of dividends to offshores at a rate of 15%. The same percentage is charged from non-resident individuals in Russia. This money will be used to support the unemployed and families with children.

To this end, the president instructed to amend agreements on the avoidance of double taxation with certain countries, starting with those, through which significant resources of Russian origin pass. During the period of the Russian-Cypriot agreement, many Russian companies have taken advantage of 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 Deputy Minister of Finance of the Russian Federation Alexei Sazanov, after the denunciation of the agreement, holdings restructuring via Cyprus will become unprofitable, and it will be more profitable to return these organisations back to Russia.