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Finance minister heads to Moscow to try and save double taxation treaty

Finance Minister Constantinos Petrides

Finance Minister Constantinos Petrides leaves for Russia on Sunday as head of the Cyprus negotiating team to discuss Moscow’s plans to scrap a deal that avoids double taxation in the two countries.

Talks between the two sides are planned for Monday and Tuesday in Moscow.

Russia’s finance ministry said Monday it would initiate a process to scrap an agreement with Cyprus aimed at avoiding double taxation – after talks to modify the deal apparently failed – and that.

The Russian finance ministry has said legal changes will make it more profitable for people to transfer money back to Russia. It said is began the procedure to scrap the agreement after the Cyprus government had refused face-to-face negotiations to update it.

“Restructuring one’s holding structures through Cyprus will of course become disadvantageous. It will be more advantageous to transfer everything back to Russia,” Russia’s Deputy Finance Minister Alexei Sazanov said.

In April Russia had notified Cyprus of changes to the tax agreement, which will come into force on January 1.

A senior source at the Cyprus finance ministry denied the government had refused to negotiate, describing the Russian claims as “a little provocative” and not an “accurate reflection of reality.”

He said: “We never refused to negotiate, we initiated negotiations, made numerous proposals that were rejected and were not officially notified about Russia’s plans to denounce the treaty.”

The finance ministry source said that Russia had requested a meeting for August 6 and the Cyprus government asked that this be put back to the third week of August for practical reasons. Rather than discuss a mutually-acceptable date for the negotiations, the Russian foreign ministry, came out with Monday’s statement, claiming Nicosia had refused to negotiate.

The conditions put forward by the Cypriot side during the negotiations were a set of exceptions that were “too wide” according to several sources on the Russian side, said the Russian finance ministry.

“To fulfill the instructions of the President of the Russian Federation on taxation of income in the form of dividends and interest paid from the territory of the Russian Federation to the Republic of Cyprus at a rate of 15 per cent, the ministry of finance of Russia on August 3 of this year begins the procedure for the denunciation of the agreement,” the Russian ministry announcement said.

Earlier this year, Russian President Vladimir Putin said all interest and dividend payments that leave Russia should be subject to 15 per cent tax, up from the current level of 2 per cent, to combat capital outflows.

The matter was discussed in a 45-minute telephone call between President Anastasiades and President Putin last month.

The Russian move would see a severe loss of tax revenue for the Cyprus government.

“There is still hope that Cyprus can gain some of its objectives at the negotiating table – it does seem, however, that the Russians want some kind of quid pro quo for agreeing to Cypriot requests,” commented director and head of tax at the Limassol-based Primus Spyros Ioannou.

“What I am concerned about is stability. With this kind of change underway, it is more difficult for businesses to come to Cyprus, to bring money here, to establish businesses here. A stable fiscal environment has been one of the selling points for Cyprus – let us hope this will not change,” he added.

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