15 October 2010

AMENDMENTS TO THE DOUBLE

TAXATION TREATY WITH CYPRUS

7 October 2010 saw the signing of a Protocol on Amendments to the 1998

Double Taxation Treaty between the Russian Federation and the Republic of
Cyprus. The Treaty was significantly amended by the Protocol. Many of the
Protocol’s provisions clearly aim to combat aggressive tax planning. At the
same time, a number of the amendments make Cyprus a more attractive
jurisdiction for Russian companies investing abroad.
The Protocol is expected to become effective in 2011 or 2012, after its being
ratified by Russia and Cyprus and the exchange of ratification instruments.
Analysis of amendments
The table below shows the principal amendments and comments thereon.

Type of income/ Current version of the Amended version Comments

subject matter of the Treaty of the Treaty
Treaty
1 Dividends 5% withholding tax ap- 5% tax rate ap- Where direct investment
plies to direct investment plies to direct in- is less than EUR 100,000,
of at least USD 100,000, vestment of at the 5% tax rate may be
subject to all necessary least EUR 100,000 kept if investment is
requirements brought up to that level

2 Interest treated as Treated as interest Treated as divi- For the purposes of this
dividends under Arti- dends for the pur- provision of the Treaty,
cle 269 of the Russian poses of the interest in excess of al-
Tax Code Treaty. lowable limits under Ar-
ticle 269 of the Russian
Tax Code (thin capitali-
sation) will be treated as
dividends, and such inter-
est being subject to Rus-
sian withholding tax will
not be in conflict with the
Treaty.

1
 Type of income/ Current version of the Amended version Comments
subject matter of the Treaty of the Treaty
Treaty
3 Rendering services No special provisions Such activities Granting powers of at-
with respect to one or give rise to a per- torney for conducting
several related pro- manent establish- activities on behalf of a
jects through one or ment Cyprus company leads
several authorised to increased permanent
persons over 183 days establishment exposure,
during a 12-month especially in the case of
period management or advisory
activities where the
authorised person is a
beneficiary and works
actively in Russia on
behalf of such company.

4 Income from a mutual No special provisions Such income is Tax structuring has often
fund established pri- treated as property involved using mutual
marily for property income and may funds for property in-
investments be subject to with- vestments. Once the
holding tax in amendments come into
Russia force, income received
by corporate and indi-
vidual non-residents
from mutual funds will
be taxed in Russia at
20% and 30%, respec-
tively. In many cases,
such structures will have
to be modified.

5 Income on sale of Exempt from Russian tax Will be taxed at This provision is de-
equity interests in 20% in Russia signed to combat the
Russian companies widespread way of sell-
which have over ing property under the
50% of their assets in guise of selling equity
real estate interests. The provision
will become effective 4
years after the Protocol
itself comes into force.

6 Disclosure of informa- The provision existed but The amended arti- The Cyprus tax authori-
tion did not work in practice cle expressly pro- ties will comply with
because of bank secrecy vides that bank duly made requests, with
and confidentiality secrecy or confi- sufficient grounds, from
dentiality shall not the Russian tax authori-
be grounds for ties. It should be borne
refusing to provide in mind that information
information on the business structure
of a Cyprus company
may in principle be
available to the Russian
tax authorities.

2
 Type of income/ Current version of the Amended version Comments
subject matter of the Treaty of the Treaty
Treaty
7 Tax collection assis- The article existed but did The article sets forth This article will allow
tance not specify any rights or a more detailed pro- the Russian tax au-
obligations cedure for tax col- thorities to send tax
lection assistance collection requests to
and applies to all the Cyprus tax au-
types of tax thorities, who, subject
to the applicable re-
quirements, will have
to comply with such
requests without go-
ing through any fur-
ther administrative or
judicial procedures.
The article will come
into effect once Cy-
prus adopts the appro-
priate legislation.

8 Tax benefit restric- The article is not included
tions in the current version of
the Treaty
Under the article, The provision does
benefits available not apply to compa-
under the Treaty nies registered in Cy-
may not be granted prus or in Russia.
if obtaining benefits However, the provi-
under the Treaty is sions do apply, inter
the primary purpose alia, to UK or BVI
or one of the pri- companies that have
mary purposes for chosen to be tax resi-
which the company dents of Cyprus. In-
was established. come received by
such companies may
be taxed in Russia at
rates specified by the
domestic tax law,
regardless of any
benefits that may
available under the
Treaty

Conclusions and recommendations

It is expected that Cyprus will be excluded from the Russian Ministry of Finance’s ‘black list’
following the signing and ratification of the Protocol. As a consequence, dividends distributed by
Cyprus companies will be exempt from Russian tax under the strategic investment income
exemption provided by the Russian Tax Code. This should make Cyprus a more attractive
jurisdiction for structuring Russian investments abroad.

Having acceded to the European Union and implemented its disclosure standards, Cyprus is now
viewed by the European countries as one of the most transparent jurisdictions. The signing of the
Protocol is expected to make Cyprus more transparent for the Russian tax authorities as well. As a
result, not all of the solutions currently used owing to the non-transparent nature of Cyprus will

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work going forward. Russian companies having Cyprus structures need to assess the implications
of the amended Treaty for their existing structures and, where necessary, take steps to bring them
up to date.

Pepeliaev Group professionals have extensive experience in cross-border structuring work in

compliance with the law. We can draw on that experience to assess the implications of the
amended Treaty for the existing Russian-Cypriot structures and minimise the resulting tax
exposure. Please note that when they undertake any restructuring in the wake of the signing of the
Protocol, and also when they continue using structures that involve Cyprus companies, Russian
and foreign companies should pay special attention to whether such steps have a business
purpose.

Should you require the text of the Treaty as amended by the Protocol, please feel free to contact
Roustam Vakhitov at r.vakhitov@pgplaw.ru

CONTACT INFORMATION

Rustem Ahmetshin
Senior Partner
Pepeliaev Group
Tel.: (495) 967-00-07
Fax: (495) 967-00-08
r.ahmetshin@pgplaw.ru

Roustam Vakhitov
Head of International Tax Service Group, LLM
Pepeliaev Group
Tel.: (495) 967-00-07
Fax: (495) 967-00-08
r.vakhitov@pgplaw.ru