Following recent developments regarding the proposed amendments by the Russian government to DTT between Cyprus and Russia, it can now be officially declared that both countries are entering a new era of business and economic relations as of 01.01.2021.
Back in December of 1998 the governments of Cyprus and Russia reached a very important agreement signing the first DTT which became a cornerstone of further relations between the two countries not only in the field of business and economy, but also in the social and cultural perspective. Over the course of time, the bonds between Cyprus and Russia were continuously strengthening and nothing foreshadowed any negative consequences.
However, on March 25th of 2020, Mr. Vladimir Putin announced the intentions of the Russian government to make certain amendments in the existing DTT with the Republic Cyprus as a part of the plan of deoffshorization and additionally to restore a fairer tax system concerning all the Russian taxpayers. The Ministry of finance of Russia referring to the source of data of Central Bank of Russia, stated that during the previous year of 2019 the amount exceeding $14,5 billion was invested directly in Cyprus by Russian companies, while the Russian government received $ 8,1 billion of direct investments from Cyprus, thus making accent on less favorable outcome of the existing treaty towards the Russian side.
Summarizing the above-mentioned reasons, the Russian side proposed to:
- Increase the withholding tax on dividends and interest paid from Russia to Cyprus from 5% (for the amount up to €100,000 and 10% for the rest of the cases) to 15% with certain exemptions, regarding regulated entities and certain types of interest on corporate bonds, government bonds and Eurobonds.
Such proposition was met with great concern by the government of Cyprus, as it would come as an additional hit to the financial sector of Cyprus (being already burdened with the pandemic crisis), which has been supported by Russian entrepreneurs for many years now, and reduce the attraction of the new investors coming from Russia, that might choose more favorable EU jurisdictions, given new circumstances, such as Malta, Luxembourg or Netherlands.
In return, the Cyprus representatives tried to negotiate the suggested terms in an attempt to diminish the negative consequences, but were unable to persuade their Russian colleagues. Moreover, the Russian Minister of Finance warned that in case of refusal of the Cyprus government to accept the changes, Russia would exit the existing agreement unilaterally.
Finally, the situation was resolved on 10th of August during the meeting between the ministers of finance of Cyprus and Russia that took place in Moscow and after which the Cypriot side accepted the new terms, as initially proposed by the Russian side. It is already made known that similar amendments were addressed to competitive EU jurisdictions of Malta, Luxembourg and Netherlands to which these European countries responded positively.
The final protocol will be confirmed and signed in September. The new DTT between Cyprus and Russia will come to effect from 1st of January 2021.
How will this new treaty affect Cyprus?
Basically, in respect to other European jurisdictions no significant changes are expected for Cyprus, as the new terms of the tax increase shall apply equally to all competitors offering attractive conditions for business development in EU. The main advantages such as the convenient location of great geopolitical importance, the climate, the cultural resemblance and the solid bonds created throughout the years of cooperation between the Cypriot and Russian nations are still in force. Though, in terms of conduction of business, Cyprus has proven to be a very professional and reliable service provider or a business partner to russian investors, the main challenge always remaining due to a high competition in the business market is to upgrade constantly and systematically the quality of corporate services and try to adopt a less conservative approach when it comes to new trends in the field of business such as online gambling, cryptocurrency companies etc. in order to keep attracting Russian investors that influence a great percentage of the yearly income of the Republic of Cyprus.
