On Tuesday, September 8, Russia and Cyprus signed a protocol on amendments to the agreement on the avoidance of double taxation.

The procedure took place during the visit of Russian Foreign Minister Sergei Lavrov to the republic on the occasion of the 60th anniversary of diplomatic relations between the two countries.

"The agreement was signed back in 1998, and, of course, there is a need to modernize it in accordance with the requirements of the present day," Lavrov said.

“Our Ministry of Finance conducts such work with all our partners with whom we have the same agreements, and these efforts are intended to make sure that the investments that our companies, our citizens make, are really aimed at implementing specific projects that bring practical benefits,” - added the head of the Foreign Ministry.

Recall that in early August, the Russian Ministry of Finance launched the procedure for the country's withdrawal from the tax agreement with Cyprus, since previous negotiations on changing the conditions did not yield results.

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 adjustments to 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.

As the chief analyst of TeleTrade, Mark Goikhman, explained to RT, the agreement was originally supposed to become an incentive to attract foreign investment to Russia.

So, if a Cypriot company receives income from a legal entity in Russia, then taxes are paid not in both countries, but only once, and at preferential rates adopted in the republic.

“However, such preferential taxation allows Russian business to significantly save on payments to the treasury.

Companies often open or buy a related firm on the island, which becomes a formal shareholder or lender of a legal entity in Russia.

It pays dividends or interest on loans to Cyprus.

At the same time, dividends are taxed from 5 to 10%, and interest on loans - 0%.

This is more than two times less than the corresponding rate in Russia (13-15%), ”explained Goikhman.

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According to 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.

As a result, the Russian Ministry of Finance suggested to colleagues in Cyprus to raise rates to 15% on both dividends and interest, but the negotiations were not immediately crowned with success.

Initially, in response to Moscow's demand, Cyprus submitted proposals that contained various exceptions and thus 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.

After that, the Russian side proposed a compromise solution to the issue, but was refused.

Nevertheless, in the end, the financial authorities of Cyprus still agreed to make the indicated amendments to the agreement.

“If Cyprus had not made concessions, a significant part of Russian citizens and companies might have been forced to change jurisdiction in order to avoid double taxation.

In this case, Cyprus could lose significant income in the form of tax, as well as potential investors in the form of people who want to obtain citizenship by investment, ”Ivan Kapustyansky, a leading analyst at Forex Optimum, told RT.

According to the approved changes, the tax on dividends and interest should not exceed 15% of the total amount of dividends.

At the same time, in some cases, a preferential percentage is provided (up to 5%) if the person entitled to dividends is a foreign insurance company or pension fund, as well as a local government body or central bank.

To the home harbor

Starting in 2021, additional income to the Russian budget from taxation of payments to Cyprus will have to amount to about 130-150 billion rubles annually.

This was previously stated by the State Secretary - Deputy Minister of Finance Alexei Sazanov.

At the same time, the equalization of tax rates may push entrepreneurs to re-register in the so-called Russian offshores.

We are talking about special administrative regions with preferential taxation.

“The new agreement will certainly leave many Russian companies without a loophole that allowed them to save on taxes.

The very construction of legal structures using Cyprus loses its meaning in many ways.

This means the likelihood of such firms returning from the island "to their home harbor," said Mark Goykhman.

Today, special tax conditions in Russia apply to the Russky Islands in Primorye and Oktyabrsky in the Kaliningrad Region.

Experts believe that large national companies can start registering their offices in Russia first.

"It is likely that big business will return to Russia from the Cypriot jurisdiction, for which paying taxes in the Russian Federation is primarily a matter of image and business reputation," Natalia Milchakova, deputy head of the Alpari information and analytical center, explained to RT.