On Russia – Cyprus double tax treaty

The presidents of Russia and Cyprus, Dmitry Medvedev and Dimitris Christofias have signed a new version of the double tax treaty. Cyprus is seemingly the largest foreign investor into the Russian economy: the total volume of Cyprus investment exceeds $52 billion, most of which, however, is repatriated Russian capital. Cypriot companies own many of the largest Russian companies.

Arseny Seidov
Baker & McKenzie

+7 495 787 2737

The changes introduced by the Protocol are indeed important.

First, once the Protocol comes into force, Cyprus will expect Russia to announce the removal of Cyprus from the so-called black-list of offshore jurisdictions. As of the effective date of such removal, dividends received by Russian shareholders from eligible equity participations in Cypriot subsidiaries would be covered by the Russian participation exemption and would not be subject to Russian corporate profits tax.

Second (with several exceptions), with respect to immovable property situated in Russia representing more than 50% of the value of Russian subsidiaries of Cypriot companies, Russia would be entitled to tax capital gains realized by such Cypriot companies from sales of Russian subsidiaries’ shares. This is certainly one of the key changes.

It would come into force in 2015 if the Protocol is ratified before the end of 2010.

The article concerning exchange of information has been also revised. The amendments are generally in line with the OECD Model Tax Convention, and reflect the changes that were introduced in the Cypriot tax legislation back in 2008.

There are precedents where the Russian tax authorities have received requested information on taxpayers under other double tax treaties or agreements on cooperation and mutual assistance on tax administration. However, in Russia such data exchange practice is rare and is subject to the relevant domestic law provisions of the country providing the information to Russia.

With respect to Cyprus, the approval of its Attorney General is required for any information transfer to the Russian authorities; other conditions must also be complied with. To date, it has been practically impossible to obtain any information from the Cypriot tax authorities under the treaty, and it is not expected that anything will change in this respect after the Protocol comes into force.