The Ministry of Finance of Russia begins to denounce the Agreement on the avoidance of double taxation with the Republic of Cyprus

The Ministry of Finance of Russia informs that the Russian Federation and Cyprus did not manage to come up with common decision about changes in the Agreement on the avoidance of double taxation (further – AADT). Due to that, Russia is going to denounce this Agreement.
12.08.2020
The AADT was made to significantly reduce the tax burden on dividends and interest on loans paid abroad. However, the situation may change in near future (approximately since 2021 year) as the Russian Federation starts to denounce the AADT with Cyprus.

In March, 2020, the Russian Federation made a decision on taxation of income in the form of dividends transferred from the territory of the Russian Federation to the overseas accounts at a rate of 15 %. Making adjustments in some AADT, concluded between Russia and foreign countries, is required to implement a new system. For this reason, in April, 2020, Russia had notified Cyprus of changes in current tax rates in terms of increasing withholding tax up to 15% on interest and dividends. The states held several rounds of negotiations but failed to develop a compromise solution.

The Ministry of Finance of Russia announced on its official web-site on August 3, 2020 about beginning of the denunciation process of the AADT with Cyprus (you can read the text of this announcement in Russian at the following link: https://minfin.gov.ru/ru/press-center/?id_4=37137minfin_rossii_pristupaet_k_denonsatsii_soglasheniya_ob_izbezhanii_dvoinogo_nalogooblozheniya_s_respublikoi_kipr.

According to the article 31 of the AADT with Cyprus, the Agreement shall remain in force indefinitely but either Contracting State may terminate the Agreement by giving of the written notice of termination to the other Contracting State. In case of termination of the Agreement it shall cease to have effect in respect of income derived or capital owned on or after the first day of January of the calendar year next following that in which the notice of termination is given. Due to that, the AADT with Cyprus may terminate since 01.01.2021.

Which consequences can be expected?
First, the denunciation of the AADT with Cyprus will cause increasing of the tax burden on business. The provision of the AADT with Cyprus provides the reduction in the rates for paying dividends up to 5% or 10%, as well as for paying interest on loans (up to 0%), whereas after termination of the Agreement tax rate may increase up to 15% and 20% respectively. Moreover, the AADT cannot be used in dual tax residency disputes. 

After the termination of the Agreement, there is a strong possibility of including the Cyprus in the Russia's Black List of Offshore Havens. In this case Russian companies, who gain income from Cyprus, can suffer from the tax rate of 13% for dividends.

The denunciation of the AADT between Russia and Cyprus will cause serious effects on many companies. That is why we recommend entrepreneurs to reconsider approaches to operate a business. It definitely worth to learn advantages, which can be provided by Russian special administrative region, to analyze possibility of the cross-cutting approach for tax optimization purposes and to use another available instruments.

For an objective risk assessment, we recommend contacting professionals. Experienced specialists in international law from CPO Group will analyze the possible consequences of the changes for your business and develop an action plan to stabilize the situation.
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