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DTT with Cyprus Improved Thanks to Royalty Scheme
Element-Traid LLC had been using the trademark 'Monetka', and paying royalties to the 'owner' company based in Cyprus. The Cypriot company that Element-Traid LLC had paid royalties to was actually a sublicensee, and had been paying royalties to a BVI company. Taxand Russia analyses this case to see how the outcome may affect taxpayers operating between Russia and Cyprus.
Originally, the owner of the trademark had been a director of Element-Traid LLC's mother company Element-Trade LLC, so Element-Traid had been able to use the trademark for free. The director later sold his rights on the trademark, and Element-Traid LLC started to pay royalties abroad.
The Russian tax authorities used information from the International Criminal Police Organisation (Interpol) to determine the shareholders of the Cypriot company receiving royalties. The shareholder of the Cypriot company was a relative of the director of the mother company Element-Trade LLC who had sold his trademark rights to the BVI company. As a result, the tax authorities claimed there was no business purpose in paying royalties to the BVI and was therefore tax evasion.
The Court ruled that the costs and business impact of the royalties paid were proven by actual documents, so the business purpose was legitimate. The Court also ruled that the use of Interpol to source information, as opposed to the DTT in place between Russia and Cyprus, was inappropriate.
It is a good sign for taxpayers that tax authorities have had to prove their claims more carefully. It also means that measures will be put in place to improve the information exchange between Russia and Cyprus.
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