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Analysis of the Cyprus-Russia DTT Protocol
In February 2012, the Russian Duma ratified the Protocol to the Agreement for the avoidance of double taxation between Cyprus and Russia and in March 2012 the Protocol was also signed by the Russian President. The Agreement was first signed in 1998 and since then, investments from Russia to Cyprus and vice versa, have increased. As the Russian President signed the Protocol before the end of 2012, the protocol is expected to come into effect on 1 January 2013 while particular provisions will come into force as of 1 January 2017. It is to be expected that this protocol will further enhance financial growth and economic cooperation between Russia and Cyprus. Taxand Cyprus summarises the major amendments that the Protocol will bring, explaining any potential implications that might arise from its enforcement.
Amendments to come in to force:
Article 4 - Resident
The Protocol further clarifies the definition of 'resident' and introduces an additional 'tie breaker' rule, which states that in situations where the place of management cannot be determined, the competent authorities of the two Parties will endeavour to determine by mutual agreement the place of management.
Article 5- Permanent Establishment
Providing services in the other State may eventually create a permanent establishment in that other State, given that the following requirements are satisfied:
i. The services are provided by an individual who is present in that other State for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 % of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in that other State through that individual; or
ii. The services are provided for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State.
Article 6- Income from Immovable Property
Income from mutual equity funds investing only in immovable property will now be considered as income from immovable property, and as a result the taxing right will belong to the State in which the immovable property is located.
Article 8- Income from International Traffic
Income from the operation in international traffic will only be taxable in the Contracting State in which the place of effective management of these persons deriving such income is situated, and therefore the taxing right will belong to the State where such person derives the relevant income and not to the State where the person is resident.
Article 10- Dividends
Although the rates of the withholding taxes have not been amended, the Protocol modifies the requirements for eligibility for the 5% rate of withholding tax on dividends. New Article 10, in order for the rate to apply, the beneficial owner must have invested a minimum of EUR 100,000 in the capital of the company paying dividends, as opposed to the previous requirement that demanded an investment of USD 100,000.
What is more, the Protocol also expands the definition of dividends. Dividends are now construed to include payments on shares in mutual investment funds and similar collective investment vehicles and depository receipts over shares.
Article 11- Interest
The Protocol also amends the definition of interest. The amended definition is in line with the OECD definition and it includes income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. However, the term "interest" shall not include for the purpose of this Article penalty charges for late payment or interest regarded as dividends.
Article 13- Gains from Alienation of Property
Article 13 of the Protocol, which follows the latest version of Article 13 of the OECD Model Treaty states that Gains derived by a resident of the Contracting State from the alienation of shares deriving more than 50 % of their value from immovable property situated in the other Contracting State will be taxed in the State where the property is situated. There are however certain exceptions to the abovementioned rule. The right to tax will remain with the country of residence if:
- The disposal qualifies as a corporate reorganisation
- The disposed shares are listed on a recognised stock exchange or
- The seller is a pension fund, provident fund or the government of either of the two countries.
Article 13 will come into effect at the time of expiration of a four year period from the date the Protocol comes into force. This transitional period will give real estate companies the opportunity to revise their structuring in order to minimise any negative outcomes and burdensome tax implications. This four - year window will allow companies to revisit their structures and consider possible alternatives.
Article 26- Exchange of Information
The new Article 26, identical to the relevant article of the OECD Model Treaty, is intended to cover taxes of all kind, both direct and indirect, and not only direct taxes that fall within the scope of the DTT.
Article 26 will allow the Competent Authorities of the Contracting States to exchange information which is deemed relevant for the administration or enforcement of domestic laws concerning all types of Taxes, insofar as these taxation laws are not contrary to the DTT. Any information received by a Contracting State shall be treated as confidential and may be disclosed by the Competent Authorities in court proceedings
In line with the above, it should also be noted that the legislation of Cyprus (Assessment and Collection of Taxes Law) has been revised accordingly, as to enable the exchange of information with other jurisdictions, by the incorporation into the domestic legislation of the exchange of information provisions of Article 26 of the OECD Model Treaty. This is seen as a measure to tackle tax evasion, which has enabled the removal of Cyprus from various blacklists for non-cooperative jurisdictions.
As a result, confidentiality and secrecy provisions under the legislation have been lifted, thus affecting the bank or professional secrecy laws, without though affecting the legal professional privilege.
As per the revised legislation of Cyprus, information may only be collected by the Cypriot Tax Authorities if the written consent of the Attorney-General is obtained.
Article 27- Assistance in Collection of Taxes
A further amendment initiated by the Protocol is Article 27 which provides that Contracting States shall lend assistance to each other in the collection of revenue claims. The protocol goes on to define what can amount to a revenue claim and provides that "an amount owed in respect of taxes of every kind" but also any "penalties and costs of collection" related to such amount.
The new Article 27 allows Contracting States to collect any taxes due to the other Contracting state in its territory. Nevertheless the Protocol does not allow a Contracting state to initiate Court proceedings in its territory for the collection of Taxes due to the other state.
Article 29- Limitations of Benefits
A limitation of benefits clause has been incorporated to the new Protocol, the ultimate aim of which is to avoid Treaty abuse. Accordingly, a resident of a Contracting state shall not be entitled to any tax minimisation or exemption on income deriving from the other State if it is concluded by the authorities of the Contracting States that the main purpose for the presence of the resident is the application of the Treaty benefits where under different circumstances they would not have applied.
As per the above, it is important to note that such limitation of benefits is subject to the mutual agreement of the two Contracting States.
The Protocol to the DTT continues to render Cyprus one of the most advantageous jurisdictions for Russian businessmen and is expected to further enhance financial growth and economic cooperation between the two jurisdictions.
Additionally, the signing of the Protocol by the Russian President will most probably remove Cyprus from the Russian "blacklist" of offshore tax havens. Such removal will permit Russian Companies to be eligible for the Russian dividend participation exemption if dividends are distributed by Cypriot subsidiaries of Russian Parent Companies. The ability to utilise the Russian Participation Exemption will reinforce Cyprus's position as the ideal jurisdiction for Russian Investments
If the minimum invested capital drops below EUR 100.000, the beneficial owner of the dividends will not be able to benefit from the reduced 5% witholding tax. Since no transition period is envisaged for this provision, the businesses who have investments in any of the contracting states should take measures to increase the amount of their investments, either by financing additional funds or by restructuring their investment portfolio, prior to the moment when they expect to receive dividends.
The removal of Cyprus from the Russian "Black" List will permit Russian companies to benefit from the dividend participation exemption. Under the participation exemption, dividends received by a Russian company from a foreign subsidiary are exempt from tax provided that the Russian recipient holds at least 50% of the charter capital of the payer company for at least 365 calendar days and the subsidiary (payer company) is not resident in a country included on the "Black list". The ability to utilise the participation exemption will reinforce the position of Cyprus as the ideal jurisdiction for Russian investments.
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