Our View: Suspension of tax treaty has little impact on the economy

The decision of the Russian Federation to suspend its double taxation agreements with a host of countries it considers ‘hostile,’ including Cyprus, because of the sanctions they have imposed, should not have come as a surprise. The surprise was that it took President Vladimir Putin so long, after the imposition of sanctions, to suspend these agreements, which benefited the ‘hostile’ countries.

This retaliatory move by Moscow is unlikely to have much of an impact on the Cyprus economy. The Russian Federation had already imposed bans on the export of funds and payments in countries that were considered ‘hostile’ because of sanctions, which had in effect stopped most commercial dealings and trade. In other words, the suspension of the agreement on the avoidance of double taxation is unlikely to have any impact on the Cyprus economy.

An announcement to this effect was issued by the finance ministry, which said there had been no prior consultations with Moscow about the matter and the Republic was informed about Putin’s decree via diplomatic channels. It will remain in place, Moscow said, until “the ending by foreign states of the violations of the lawful economic and other interests of the Russian Federation, the rights of its citizens and legal entities.”

As the sanctions are unlikely to be lifted any time soon, the suspension of the double taxation agreement may last a while. Thankfully, we are prepared for it, and it will not cause the same type of consternation in financial services circles as was the case three years ago when Moscow sought to have the treaty amended and threatened to have it revoked if it were not.

As a result of sanctions, the Cyprus economy’s dependence on Russian business and money has been drastically reduced to the point that the suspension of the double taxation treaty raises no fears. In fact, the economy performed very well despite the sanctions in 2022, GDP growing by an impressive 5.6 per cent. Tourism was not affected by the termination of air links with what was Cyprus’ second largest tourist market, although fears were rife that it would be. This year tourist arrivals, despite the closure of the Russian market, are set to exceed those of 2019 which was a record year.

This would suggest that our economy’s dependence on Russia is over. Perhaps it was never as big as our authorities and business leaders claimed. Whatever the explanation, the fact that there has been no major impact on the economy from the sanctions is a positive development. It is also the reason the finance ministry can shrug off the suspension of the treaty on the avoidance of double taxation, assuring, with good reason, that it would have little effect on the economy.