Russia and Cyprus have signed a new double taxation avoidance agreement which
should finally secure Cyprus's removal from the notorious Russian 'blacklist'
of jurisdictions which have not demonstrated a sufficient level of cooperation
with the Russian tax authorities.
The protocol, the result of several years of hard bargaining, was signed in
Nicosia by Finance Minister Charilaos Stavrakis and Ilya Trunin, a senior tax official in the Russian Finance Ministry.
The existing tax treaty between Russia and Cyprus has been one of the major reasons
for the huge flow of Russian investment through the Mediterranean island
in recent years. In 2006, 21.6%, or USD28bn, of the USD130bn total accumulated
investments in Russia came via Cyprus, while Russian deposits in Cypriot banks
are said to exceed USD26.35bn.
However, in December, 2005, then head of the Russian tax service, Anatoly Serdyukov,
announced that double taxation avoidance agreements would be reviewed to prevent
companies from avoiding tax by registering offshore, and to "protect Russia's
economic interests". According to Serdyukov, the federal budget was
deprived of more than USD2bn in unpaid profit tax by oil firms during 2004 because
the owners of these firms were resident for tax purposes in low tax jurisdictions,
such as Cyprus.
Last year, Russia added Cyprus to a 'blacklist' of 54 countries, on the grounds
that it was an ‘uncooperative territory’. This blacklist was part
of an amendment to the Russian tax code which introduced a tax exemption on
the repatriation of dividends from foreign subsidiaries of Russian companies
under certain circumstances. Russian subsidiaries based in territories and countries
on the so-called blacklist were not included in the exemption.
Many European countries such as Ireland, Luxembourg and Switzerland successfully
lobbied the Russian government to be removed from the blacklist, but Cyprus
remained on the list due to its apparent failure in the past to fulfil requests
for information from the Russian tax authorities in certain cases. According
to Stavrakis, Cyprus's name will be erased from the blacklist once the new protocol
is fully ratified by both parties, thanks in large part to a commitment by Nicosia
last year to improve exchange of information provisions.
Stavrakis said that the new agreement maintains "the very low and competitive
factors Russians are enjoying today concerning investments through Cyprus"
although he conceded that Russia succeeded in winning "a significant number
of concessions" that they had been asking for.
A major concession won by Russia will see capital gains made by Russian subsidiaries
of Cypriot holding companies with more than 50% of their assets in Russian property taxed at the prevailing rates in Russia.
Trunin remarked that the amendments ensure that the double tax agreement will
not be used "in an inappropriate way" by residents and investors in
Cyprus and Russia, but would nevertheless result in Cyprus's removal from Russia's
"list of offshore jurisdictions" which he stopped short of calling
a "blacklist."
LAWANDTAX-NEWS.COM
