Cyprus-Russia sign protocol amending DTT

On 16 April 2009 the Republic of Cyprus and the Russian Federation signed a Protocol to the Double Tax Treaty (DTT) between the two countries. Formal ratification is expected by both countries during 2009 so that the protocol could become effective as from 1 January 2010.

As a result, Russian authorities have agreed to remove Cyprus from its “black list” and consequently dividends received by Russian companies from Cypriot subsidiaries can qualify for the Russian dividend participation exemption.

The major changes of the new DTT involve the following:

a. Withholding tax rate on dividends (Article 10 of the Treaty)
There is no change on the withholding tax rate on dividends. However there is a maximum withholding tax on dividends received from Russian subsidiaries of 10% which is reduced to 5% in the case where the minimum investment amount in the direct investment in Russian entity is €100.000 (the 10% withholding tax still applies where the investment amount is less than €100.000).

The definition of the dividends has also been expanded to include payments on shares of mutual investment funds or similar collective investment vehicles so that such distributions would have a maximum withholding tax of 10% withheld by the paying company.

b. Change in the taxation of capital gains on the disposal of shares in real estate property companies the effective date of which is 1st January 2014 (Article 13 of the Treaty)
The treaty has been amended so that the capital gains derived by a resident of one country from the disposal of shares in a company deriving more than 50% of the value of its shares from immovable property situated in that other country, are taxed in the country where the immovable property is situated. This change is in line with the OECD Model Tax Convention on Income and Capital.
Capital gains from disposal of shares remain under the taxing right of the country of residence of the selling party if: - The disposal qualifies as a corporate reorganization or - The gains are from the disposal of shares listed on a recognized stock exchange or - The seller is a pension fund, a provident fund, the government of Cyprus or the Russian Federation

c. Resident (Article 4 of the Treaty)
Currently, the place of residence of a party is determined by the entity’s place of “effective management” (where the management and control of that entity is exercised). The protocol has introduced a provision where in cases where the “effective management” cannot be precisely determined, then the authorities of the two countries will resolve the issue by mutual agreement.

d. Permanent establishment (Article 5 of the Treaty)
The definition of permanent establishment is extended to allow for the taxation of profits from services performed in one country by an entity of the other country through an individual or individuals present in the other country for more than 183 days in a 12-month period and more than 50% of the gross revenues of the enterprise attributable to its active business activities during this twelve month period are derived from the services performed in that other country through that individual.
The new paragraph follows the wording circumscribed by the OECD Model Treaty Committee in the Commentary to the latest Model Treaty for countries which wish to include such a provision.

e. Definition of Interest (Article 11 of the Treaty)
The definition of interest has been amended to align with the wording of the latest OCED Model Treaty definitions. This definition was expanded to include debt-claims of any kind which may or may not be secured by mortgage and may or may not be profit participating loans. However, penalty charges for late payment or interest are not considered as interest but as dividends.

f. Exchange of Information (Article 26 of the Treaty)
The article on exchange of information has been amended in order to be in line with the latest OECD Model Treaty. More clarity has been introduced in relation to the powers and obligations of the tax authorities of the two countries which are generally aiming at improving the administration procedures through which information can be collected and exchanged between the tax authorities in Russia and Cyprus, subject to certain conditions and procedures.

The inquiring jurisdiction may request a confirmation of identity of a person under investigation as a beneficial owner of a company but may not inquire as to the identity of a beneficial owner of a particular company without having submitted identification. This means that while a confirmation may be obtained, an inquiring jurisdiction is not permitted to commence a fishing expedition on an individual.

This position has been also established in Cyprus’ domestic legislation, Law 72(I)/2008 (the ‘Law’). In accordance with the Law the inquiring country must provide the Commissioner of the Inland Revenue of Cyprus (the ‘Commissioner’) with (among identification of the individual under investigation and other stipulated matters) the tax reasons and evidence why this information is required. A declaration from the inquiring country must be provided to the Commissioner demonstrating that the request for information is in accordance with its domestic legislation and administrative practice. The Commissioner will not release the requested information unless it has been satisfied that the respective disclosure is also permitted under the laws of the inquiring jurisdiction.
Furthermore the Commissioner shall not by Law, provide the requested information unless the written consent of the Attorney General of Cyprus has been provided.

g. Limitation of treaty benefits (Article 29 of the Treaty)
A new limitation of treaty benefits has been introduced that seeks to disallow benefits of the treaty to an entity that was established with the main purpose of obtaining such benefits of the treaty that would not otherwise be available and the entity is not registered in Cyprus or in Russia. This limitation will not impact companies incorporated in Cyprus or in Russia. However this limitation will affect a company registered in a country other than Cyprus and Russia but which is managed and controlled in Cyprus and thus considered tax resident of Cyprus.

h. Other changes
- The income from International Traffic (ie shipping and aircraft) will be taxable in the country where the effective place of management of the person deriving such income is situated (under the existing treaty the taxing right belong to the country in which the person deriving the income is resident. - It has been clarified that income of Mutual Funds investing only in immovable property would be treated as income from immovable property and such income will be taxable in the country where the property is located.