Amendments to Tax Treaty with Cyprus

Russian Government has submitted the Protocol amending the Russia-Cyprus Double Tax Treaty to the State Duma for ratification. It was signed on October 07, 2010 during the visit of President Dmitry Medvedev to Cyprus. The Protocol seeks to tighten rules on tax breaks and information exchange.

Thus, the Protocol introduces the article ‘Limitations of Benefits’ allowing the Cypriot authorities to refuse tax benefits where ‘it was established … that the main purpose (or one of the main purposes) of the creation or existence of such resident was to obtain benefits’.

Article 26 (‘Exchange of Information’) of the amended treaty will extend the exchange of information between the countries to tax violations, not just to information about taxes as it is currently the case. Banks and other financial institutions, nominee shareholders, agents and trustees will not be able to refuse giving information to the authorities.

The amendments will come into force on January 1 of the year following ratification

Anna Voronkova

Director, Tax & Legal
KPMG in Russia and CIS

The Protocol does indeed introduce various amendments to the Russia–Cyprus Double Tax Treaty.

Most of the changes concern Cypriot companies with shares in Russian companies or Russian mutual funds that have investments in Russian real estate. For example, whereas capital gains received by a Cypriot company from the sale of shares in any Russian companies are not currently subject to withholding tax in Russia, the disposal by a Cypriot company of shares in companies, more than half the capital of which comes from Russian real estate, will be subject to profits tax in Russia at the 20% rate once four years have passed since the ratification of the Protocol.

Another important change concerns the exchange of information between Russian and Cypriot government bodies. The existing article in the agreement has been brought into line with the OECD Model Convention, and the list of information that Russian tax authorities can request from their Cypriot colleagues has been expanded to include, for example, data on the registered shareholders of Cypriot companies, information on transactions concluded, etc.

However, the procedure for providing information is regulated in detail by relevant Cypriot legislation. For example, the provision of information to Russian competent bodies must in each case be approved by the Cypriot Prosecutor General once the latter is certain that all the necessary conditions have been met.

It should be noted that in recent times the Russian tax authorities have been making increasing use of the information exchange arrangements provided by current double tax agreements to obtain information on transactions carried out by Russian companies with foreign companies, and have been using this information to impose additional tax liabilities, with regard not just to Cyprus, but to various other European countries as well.

In addition, the Finance Ministry is currently conducting negotiations with a range of foreign states on double taxation agreement amendments similar to those made to the agreement with Cyprus, covering, in particular, the exchange of information and relief restrictions. For example, a protocol of amendment between Russia and Luxembourg is currently at the final approval stage.

It is clear that in future Russian tax authorities will pay even closer attention to international structures using Cypriot and any other foreign companies, and will focus on whether there is an actual business purpose for creating such international structures used by Russian businesses. In view of this fact, we recommend analyzing existing structures closely to ensure that they are tax efficient and to minimize the risk of disputes with Russian and foreign tax authorities.

KPMG in Russia and the CIS