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Cyprus-Russia Double-Tax talks see tough negotiations

Finance Minister Constantinos Petrides

by Philippe Orphanides

“We will not change our position. We just hope that, placing the denunciation and our proposal on the scales, common sense will prevail, and colleagues from Cyprus will agree”, said yesterday Deputy Finance Minister Alexey Sazanov on Rossiya 1 channel.

Sazanov is one of twelve Deputy Ministers of Finance and probably the youngest. The language in his statement is clear and the terms proposed by Russia for the double tax treaty with Cyprus have not changed.

But there is reportedly some room for negotiation that would justify the Cypriot Finance Minister and his high-level delegation’s last-minute trip to Moscow, as Sazanov stated earlier in the weekend that “Cypriot colleagues will once again be asked to agree to revise the withholding tax rates on interest and dividends to 15 per cent, taking into account individual exemptions for institutional investments”.

By institutional investments, the Russian Finance Ministry means the exceptions proposed by the Cypriot side regarding bank loans, bonds and direct investments of public companies.

But the language has been mostly diplomatic, and the latest developments show that Russia has secured additional leverage to force through the deal as is. Before coming up with the series of exceptions, Cyprus had demanded a fair approach to all jurisdictions, and Russia seems to have moved accordingly.

Indeed, Malta and Luxembourg have just agreed to amend their respective DTTs with Russia and raise the tax rates on interest and dividends from Russia to 15 per cent.

And the Netherlands has not been spared either. Today, the Ministry of Finance of the Netherlands received a letter from the Russian Federation with a proposal to amend the current DTT with the exact same terms as Cyprus, Malta and Luxemburg.

According to BNE Intellinews editor-in-chief Ben Aris, former Daily Telegraph bureau chief in Moscow, “Russian companies are reluctant to move back. Some will, but it will entail higher taxes and also politically expose their companies to expropriation, therefore I think the majority of Russian companies will ignore the pressure to come home.”

Lenta, however, one of the largest Russian retailers, will re-domicile from Cyprus to a special administrative region on Oktyabrsky Island in the Kaliningrad region.

Lenta is one of the largest retail chains in the Russian Federation, operating 380 stores in Russia and employing some 35 000 people. The company explained its decision by the desire to optimize the costs of corporate governance of the company.

Russia has, in fact, been promoting its own offshore areas and that is one of the drivers behind its position on the double-tax treaty.

In July 2018, the Russian Parliament adopted a bill authorising the creation of two offshore zones in the country. The first one is on Rousski Island, opposite Vladivostok, near the border with North Korea. The second is located on Oktiabrsky Islandin the Kaliningrad enclave, in northern Poland.

The Rousski Island offshore area seeks to attract Asian business neighbors, while the Oktiabrsky Island area hopes to attract the interest of European businessmen. According to the Russian Ministry of Finance, 32 international companies and one fund are now registered on the Russkiy and Oktyabrsky Islands. At the start of the year, there were 23.

It’s not clear whether the Russian budget will actualy benefit from it, particularly if the companies re-domicile in offshore zones where only 5 per cent tax applies on dividends. There is a precondition however: Companies will have to invest at least ₽100 million per year, or about €1.3 million, in Russia.

“This is a new direction for the state, a new attitude towards businesses. This is a cardinal change for business but the negotiations with all countries will take time, although the line is clear, capital needs to return in the special offshore zones”, says Yuri Yudenkov, Head of the Faculty of Public Policy at Moscow State University MGU.

Victor Kalgin, Partner at the Tax and Legal Department of KPMG Russia, believes that not many companies will re-domicile from Cyprus and some will use the “pass-through” or “look-through” approach, where dividends pass through an offshore entity and are paid to a Russian citizen, to be able to maintain structures in Cyprus even in the absence of a DTT.

When distributing dividends to a Cyprus entity, the ultimate beneficial ownership principle is used in the “pass-through” scheme. This means that dividends pass through the Cypriot entity to the final beneficiary, which is essentially a transfer of dividends between Russian legal entities and is subject to a 0% dividend rate.

The problem with this approach, however, requires disclosing the identity of the beneficiary of dividends, which all can agree, goes beyond the purpose of an “offshore” structure.

But how much money is still left in Cyprus and to what extent can it be still considered a tax haven for Russian businesses? IN the backdrop of regulatory pressure coming from all sides, numbers show that since 2013 Russian deposits in Cyprus had already dropped to $3.5 billion from $19 billion in 2018.

 



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