Russia started the procedure of withdrawal from the agreement on the avoidance of double taxation with Cyprus. On Monday, August 3, reported the press service of the Ministry of Finance. Under the agreement, domestic companies could register their offices on the island and pay taxes at a rate two times lower than in Russia. For the duration of the agreement, this possibility was used by many representatives of Russian business, which over the past two years have brought to Cyprus more than 3 trillion rubles. As a result, Moscow has proposed to equalize the tax rate, but was refused. Experts believe that after the cancellation of the contract will be unprofitable for the companies registered in the Republic, which will lead to return business in the Russian jurisdiction.

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The Ministry of Finance started the procedure of withdrawal from the agreement on avoidance of double taxation with Cyprus. On Monday, August 3, reported the press service of the Ministry.

Also

Tax update: Vladimir Putin has suggested to raise the pit rate for Russians with high income

On Tuesday, June 23, Vladimir Putin proposed to increase the pit rate from 13% to 15% for citizens earning more than 5 million rubles per year….

The Agency has taken such a step to execute the orders of the President of Russia Vladimir Putin. In late March, the President ordered to raise the tax for the transfer of dividends and interest on foreign Bank accounts to 15% in 2021.

“All payments of income, interest and dividends, stretching from Russia abroad in an offshore jurisdiction, should be subject to appropriate tax. Now two-thirds of such funds, and, in fact, it is the income of specific individuals, as a result of different types of schemes, the so-called optimization subject to a tax rate of only 2%,” — said Putin.

The Russian leader noted that such a step will require the adjustment of agreements to avoid double taxation with several countries. In case of refusal of States to accept new conditions Russia will unilaterally withdraw from such contracts.

“Cancel the agreement with Cyprus is a continuation of the policy of the Russian government for de-offshorization. The agreement provided a sufficiently large tax loophole, which was used for many years. The fact is that when you register Cyprus business could pay Cypriot tax and to avoid tax in Russia”, — has explained in conversation with RT tax lawyer “Rocket” Nikolay Danilov.

As noted in the Ministry of Finance over the lifetime of the agreement with Cyprus its jurisdiction was used by many Russian companies. So, in 2018, the Republic was derived 1.4 trillion rubles, and in 2019 — more than 1.9 trillion.

“The existing tax Treaty with Cyprus provides a very attractive environment from the point of view of taxation. Rate dividends paid to Cyprus can be reduced to 5 or 10%, and the interest on the loans to 0%. It is more than two times less than the corresponding rate in Russia (13-15%). The Finance Ministry has proposed to colleagues in Cyprus to raise rates to 15% as dividend and interest, however negotiations have not crowned success” — said the Russian Ministry of Finance.

The Department explained that the second sentence of Cyprus contained various exceptions and thereby erode the effect of the initiative for the Russian budget. The result is the tax-free withdrawal of large amounts of money from Russia to the Republic could continue, according to the Ministry of Finance.

“However, given the close economic and historical ties between the two countries, the Russian side has formulated the ways a compromise solution to this issue and offered promptly in the course of this week to hold face-to-face talks in Cyprus in order to reach the decision, but were refused”, — added in the Ministry.

  • The building of the Ministry of Finance of the Russian Federation on Ilyinka street in Moscow
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According to experts, the increase in the tax rate when the dividends to Cyprus to 15% would lead to the fact that the registration office in Russia and the island would be equally attractive to companies. Meanwhile, after breaking the agreement businesses will be forced to pay two taxes: a reduced — in Cyprus than in Russia. Thus, to register a Russian company in the country is unprofitable, explained Nikolay Danilov.

As told by RT, chief analyst at TeleTrade mark Goikhman, other popular countries with low taxes can also refuse the offer of Moscow that will lead to a similar gap agreements. The national companies will start to actively register their offices in Russia, the expert believes.

“This situation can bring the budget about 100-160 billion rubles a year. But, of course, business will look for other opportunities to save. This may encourage entrepreneurs to re-register in the so-called Russian offshore. We are talking about special administrative regions with the preferential taxation”, — said Goikhman.

To date, the special tax conditions in the country are the Islands in the Russian Primorye and October in the Kaliningrad region. As stated by the state Secretary — Deputy Minister of Finance Alexey Sazanov, in the near future the Russian authorities plan to increase the attractiveness of both jurisdictions for business.

“Strive will all translate back to Russia. We are going to improve the legislation in the part of the administrative districts in order to make the jurisdiction more attractive for the transfer of holdings back to Russia,” Interfax quoted Alexei Sazanov.