The Russian Ministry of Finance has sent an official request to the Ministry of Finance of Cyprus to modify the existing double taxation treaty (the “DTT”) between the two countries.

In his speech to the nation Mr. Putin sated that If the states to which the official requests is sent, refuse to negotiate the requested amendments to their respective double tax treaties, Russia reserves the right to terminate the DTT unilaterally.

Requested amendments

Due to the continuous usage by multinational enterprises of the tax favorable jurisdictions in such a way that shifts profits from Russia, in Russian Federation itself such cause of action gives rise to unfair tax competition, negatively affecting good-faith taxpayer. To counteract such activity the following modifications have been proposed:

(i)    Article 10. The withholding taxation rate on dividends is proposed to be increased to 15%. Currently, applicable rates vary from 5% to 10%, depending on fulfilment of investment criteria.

(ii)   Article 11. of the DTT will be amended to introduce withholding taxation of outbound interest payments at a 15% rate. Currently, such cross-border interest payments are exempt from withholding taxation under the DTT.

If the requested amendments are introduced to the DTT, it may be reasonable to expect that newly increased withholding tax rates will not only apply to direct payments made to Cypriot entities, but also indirect ones made through other jurisdictions, provided that the ultimate beneficial owner of such income is located in Cyprus (based on recent court practice on beneficial ownership issues).

It is expected that Cyprus strictures which have in their corporate chain Netherlands, Switzerland and/or Luxembourg (there may be others) will need to reconsider existing corporate structures, in particular to remove such intermediary layers lacking real economic substance, if the requested amendments are introduced or unilaterally revoked in relation to abovementioned jurisdictions.

If the amendments to the DTT are accepted, they shall enter into force one year after acceptance.