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. Last Updated: 07/27/2016

Cyprus Treaty to Raise Revenue

The new double tax treaty between Russia and Cyprus should provide Russia with additional tax revenues without making it unprofitable for companies to operate here through Cyprus offshore entities, according to an analytical report by Deloitte & Touche.

The treaty was signed last week after months of negotiations. Details of the agreement only became available this week.

The new agreement is meant to replace a 1982 Cyprus-Soviet Union treaty, signed at a time when the Soviet authorities could not even imagine a market economy in this country. The old treaty was unusually lax because it did not cover numerous types of business transactions that have emerged in Russia since economic reforms started in 1992.

Now, taxes will have to be paid in several cases not mentioned in the old agreement.

Cyprus companies that own stakes in Russian companies will have to pay withholding tax to Russia. If the Cyprus company's stake is worth more than $100,000, the tax rate is set at 5 percent, and for smaller stakes it is 10 percent.

"Many Cypriot companies doing business in Russia will have little difficulty proving that their investment is greater than $100,000," Deloitte & Touche wrote in its report.

Many foreign and domestic companies have chosen to make sizable investments in Russia through Cyprus. For example, a consortium including George Soros, Russia's Uneximbank and a number of large Western investment banks last year acquired a 25 percent stake in telecommunications holding Svyazinvest through a Cyprus company called Mustcom. The investors paid almost $1.9 billion for the stake.

The Deloitte & Touche report also pointed out that Cypriot offshore investors already pay a 4.25 percent profit tax in Cyprus while receiving a full tax credit for all income withheld in Russia. Thus, the new treaty will mean only an extra three-fourths of a percent tax for many offshore companies.

As before, no withholding tax will be levied on interest and royalty payments.

There is one more point in the treaty that increases taxation of Cypriot offshores operating in Russia. The old treaty exempted Cypriot companies with permanent representation in Russia from Russian property taxes on movable property. The new treaty does not.

Deloitte & Touche pointed out in its report that the change was logical. The new treaty follows the model for such agreements drafted by the Organization for Economic Cooperation and Development.

"This represents a clear departure from the preferential treatment afforded Cyprus under the previous agreement," Deloitte & Touche said.

Movable property owned by Cyprus companies without permanent representation in Russia will not be taxed.

Generally, the new agreement is quite favorable for investors, the Deloitte & Touche report said.

"The new treaty provides the Russian tax authorities with additional sources of revenue," the report said. "At the same time, after literally years of uncertainty, Cyprus can continue to claim to have one of the best double tax treaties with the Russian Federation."

The treaty is still subject to ratification by the parliaments of both countries.