The Russian Ministry of Finance has launched the procedure for the country's withdrawal from the agreement on the avoidance of double taxation with Cyprus. This was announced on Monday, August 3, by the press service of the ministry.
The department took such a step to fulfill the instructions of Russian President Vladimir Putin. At the end of March, the head of state ordered to increase the tax on the transfer of dividends and interest to foreign accounts to 15% from 2021.
“All payments of income in the form of interest and dividends that go from Russia abroad to offshore jurisdictions should be taxed adequately. Now two-thirds of such funds, and, in fact, these are the incomes of specific individuals, as a result of various so-called optimization schemes are subject to a tax rate of only 2%, "Putin said.
The Russian leader noted that such a step would require adjusting agreements on the avoidance of double taxation with a number of countries. If states refuse to accept the new conditions, Russia will unilaterally withdraw from such agreements.
“Cancellation of the agreement with Cyprus is a continuation of the course of the Russian government towards deoffshorization. The treaty provided a fairly large tax loophole that had been used for many years. The fact is that when registering in Cyprus, a business could only pay the Cypriot tax and avoid tax in Russia, "Nikolai Danilov, tax lawyer of the Raketa company, explained in a conversation with RT.
As noted in the Ministry of Finance, during the term of the agreement with Cyprus, many Russian companies have used its jurisdiction. So, in 2018, 1.4 trillion rubles were withdrawn to the republic, and in 2019 - more than 1.9 trillion.
“The existing tax agreement with Cyprus provides very attractive conditions in terms of taxation. The rate for the payment of dividends to Cyprus can be reduced to 5% or 10%, and on interest on loans - to 0%. This is more than two times less than the corresponding rate in Russia (13-15%). The Ministry of Finance proposed to colleagues in Cyprus to raise rates to 15% on both dividends and interest, but the negotiations were unsuccessful, ”the Russian Finance Ministry said in a statement.
The ministry explained that the reciprocal proposals of Cyprus included various exceptions and thereby diluted the effect of the initiative on the Russian budget. As a result, the tax-free withdrawal of significant amounts of money from Russia to the republic could continue, according to the Ministry of Finance.
“At the same time, taking into account the close economic and historical ties between the two states, the Russian side formulated options for a compromise solution to this issue and offered to promptly hold face-to-face talks in Cyprus during this week in order to come to a solution, but was refused,” - added in the ministry.
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According to experts, an increase in the tax rate for the withdrawal of dividends to Cyprus to 15% would lead to the fact that the registration of an office in Russia and on the island would become equally attractive for companies. Meanwhile, after the termination of the agreement, the business will be forced to pay two taxes at once - a reduced one in Cyprus and a higher one in Russia. Thus, it becomes unprofitable to register a Russian company in the republic, Nikolai Danilov explained.
As TeleTrade chief analyst Mark Goykhman told RT, other popular countries with low taxes may also refuse Moscow's offer, which will lead to a similar break in the agreements. As a result, national companies will begin to more actively register their offices in Russia, the expert said.
“This situation can bring the budget about 100-160 billion rubles a year. But, of course, business will look for other ways to save money. This can push entrepreneurs to re-register in the so-called "Russian offshore". We are talking about special administrative regions with preferential taxation, ”said Goikhman.
To date, special tax conditions in the country apply to the Russky Islands in Primorye and Oktyabrsky in the Kaliningrad Region. State Secretary - Deputy Finance Minister Alexei Sazanov said that in the near future the Russian authorities plan to increase the attractiveness of both jurisdictions for business.
“It will be more profitable to transfer everything back to Russia. We are now going to improve the legislation in part of the administrative regions in order to make these jurisdictions more attractive for the transfer of holding structures back to Russia, "- quoted by Interfax Alexey Sazanov.