Denunciation of double taxation agreements

As of August 3rd, 2020 the Ministry of Finance of the Russian Federation announced the withdrawal from the Double Taxation Agreement with the Republic of Cyprus.

The Ministries of Finance of Luxembourg, Malta and the Netherlands also received the letters about the introduction of amendments to the reciprocal agreements.

The amendments were made in the framework of implementation of instruction of the President of Russia on increase of income tax rates from dividends and interests, which are withdrawn to the rest of the world accounts. This measure is meant to help to recover the damages from the economic crisis and pandemic, closing the door of large capital outflow from Russia.

As a reminder, the tax rate on dividends in the current agreement with Cyprus might be reduced to 5% or 10%, on interests – to 0%. Standard tax rate in Russia is higher: on dividends equals to 15%, on interests – to 20%.

The Ministry of Finance of Russia proposed to increase the income tax rate on dividends and interests arriving from the Russian companies to parent companies, registered in low-tax jurisdictions, to 15% starting from January 1st, 2021.

Luxembourg and Malta accepted the Russian proposal to reconsider the terms of the agreement. The Netherlands’ decision is still expected, but is likely to be positive.

Cyprus is the hardest-hit party being the most popular jurisdiction of the Russian business. According to the Ministry of Russia, more than 1,9 trillion RUB or 27 billion USD were withdrawn to Cyprus in 2019. This sum surpasses the Cyprus GDP, which amounted to 24,5 billion USD in 2019..

Cyprus disagrees with the Russian plans and sets forwards its own suggestions, as the decrease of the budget revenue might become significant. The results of the negotiations will become available after the regular meeting on the August 11th.

After the introduction of amendments, it will be unprofitable to use low-tax jurisdictions for the tax avoidance. The repatriation of the Russian holdings should be first of all expected to the regions with the special treatment - the Far East and Kaliningrad.

It is possible to monitor the changes of shareholders and beneficiaries in the Russian companies, as well as to get the information on affiliated international companies in the Globas.