Protocol to Russia-Cyprus tax treaty signed



Mon, 11/10/2010 - 14:26



On 7 October the Russian delegation led by President Medvedev signed with their respective Cyprus counterparts a protocol to the Russia-Cyprus double tax treaty.

The protocol amends the existing treaty which entered into force on 1 January 1998.
According to law firm Harneys, the main changes to the treaty can be summarized as follows: 

The relevant provisions of the treaty on exchange of information and on assistance in collection of taxes are brought in line to accord with the latest version of the respective articles in the OECD Model Tax Convention;

Dividends have been given a broader definition in the new protocol to include payments on shares of mutual investment funds or other similar collective investment vehicles and depository receipts for shares;

The capital gains article has been amended to permit a contracting state to tax capital gains from the sale of shares in companies which hold more than 50 per cent of their assets in Russian immovable property. This new provision was inserted to ensure alignment with the respective articles in the OECD Model Tax Convention with the gains from the sale of shares now being taxable in the country in which the immovable property is situated;

Distributions by real estate investment trusts and real estate investment funds will be treated and taxed as income from real estate (instead of being treated as dividends or other income for the purposes of the treaty);

The exemption of international transportation income from source taxation will be available now only to companies with the “place of effective management” in the residence state; just a “residence” is not sufficient anymore;

A new limitation of treaty benefits article has been introduced disallowing benefits accruing to a company which was created for the specific purpose of obtaining such benefits provided that the company is not registered either in the Russian Federation or in Cyprus. This limitation will therefore not apply to companies incorporated in Russia or Cyprus but will likely impact companies not incorporated in Cyprus but which for the purposes of taxation are resident in Cyprus by having their management and control in Cyprus.

The protocol is expected to enter into effect on 1 January 2011 provided it is ratified by both Russia and Cyprus before the end of 2010, with the proviso that the amendments to the capital gains article will come into effect four years after ratification of the protocol and the article on assistance on collection of taxes will come into effect at the time when Cyprus amends its domestic tax legislation to allow for the application of such procedures (current Cyprus tax legislation allows such assistance to be extended only to other EU Member States).
The ratification of the protocol will effectively remove Cyprus from a Russian blacklist of jurisdictions which Russian authorities deemed uncooperative and heralds strengthened ties between the two nations.

Aristodemou Loizides Yiolitis was founded in 2006 and merged in 2009 with offshore law firm Harneys. The combined firm advises on the laws of Cyprus, the British Virgin Islands, the Cayman Islands and Anguilla.