At the beginning of October 2010 Russia and Cyprus signed the Protocol amending the Agreement for the avoidance of double taxation. These amendments have been made to tighten the taxation of a number of financial transactions in the real estate sphere and to expand the capacity of government bodies to receive information about the companies and their owners registered in any of these two countries. After the completion of an official ratification procedure in 2012 this document came into force on January 1, 2013
Several Key Consequences for the Real Estate Trade Sector in Russia
Cyprus is an attractive place for the investments of Russian companies. One of the popular corporate structures on the real estate market in Russia is a tree-level structure that includes Russian companies having immovable property in Russia, a Cyprus holding company that owns shares of the Russian companies and often a financial (investment) company that has the majority ownership and is located on the British Virgin Islands, Bahamas, Cayman Islands or other similar jurisdictions, and which owns shares of the holding company.
The most significant changes
- The sale of shares/securities of the companies (or similar rights) in which the part of immovable property exceeds 50% of the total actual offer price will be taxed in the country of property location. This provision will be applied from the beginning of the year upon the expiration of four years since the Protocol comes into effect, that is, no earlier than on January 1, 2017.
- A change of the “dividend’ term will allow applying the rules of insufficient capitalization to the payment of interest. The dividends will be defined as revenues received in the form of payments from the unit investment trusts or similar investment instruments (except payments from investment trusts and real estate funds), as well as interest payments – if it is subject to the same taxation as share revenues in accordance with the legislation of Russia and Cyprus, in which the dividend paying company is resident.
- Revenues from unit investment trusts will be also taxed in Russia. Article 6 of the Agreement envisages that revenues received by a resident of Cyprus from the use of any immovable property (including letting it on lease) located in Russia can be taxed in Russia. The Protocol expands the application of this article, which begins including revenues received as a result of unit real estate fund activities.
- The changes also influenced the current rules related to the marginal tax rates for dividends (5% or 10%), interest (0%) and license tax (0%), as stipulated in article 10 of the Agreement. From now on the dividends are subject to privileged taxation, provided that the person who has the right to receive the dividends, had directly invested at least Euro 100,000 (previously it was US$ 100,000) in the company capital. In all other cases the 10% rate shall be applied.
- Opportunities to exchange information between the governments of Cyprus and Russia as well as the opportunities to provide assistance for the collection of taxes will be expanded.
- Thanks to ratification of the Protocol, Cyprus will be removed from the Russian ‘black list’. Dividends paid to the Russian companies from the participation in Cyprus will not be taxed in the following cases:
- The beneficiary is a participant of a Russian company for at least 50%;
- When a decision on dividend payment is made, the beneficiary has participated in the Russian company for at least one year;
- The amount of investment is RUR 500,000,000 (approximately Euro 13,600,000) and more.
- A new article 29 “Limitation of Benefits” is limiting the advantages of the Agreement for the avoidance of double taxation if it is established that the only goal (or one of the goals) of the entity is to misapply this Agreement.
It should be noted that these changes are related not only to the taxes specified in the Agreement, but also to all other taxes applied on behalf of the state, participating in the Agreement. However, it is envisaged that one of the parties to the Agreement may not provide the required information to the other party, if this information leads to a disclosure of commercial, business, industrial or professional secrets of the trade process, or if such a disclosure contradicts the national policy of the country, which is supposed to provide such information. All requirements must be supported with documents and submitted to the International Tax Relations Unit (ITRU).