Dmitry Medvedev, President of Russia, and Demetris Christofias, President of Cyprus met last week to discuss bilateral relations, although there appears to be little sign yet that Moscow is ready to remove Cyprus from its tax 'blacklist' despite optimistic noises from the Cypriot leadership.
When asked about the blacklist, Christofias responded that discussions were proceeding "in a very friendly spirit," adding: "I want to believe that very soon we can announce good news.”
Medvedev said during last week's official visit to the Kremlin by Christofias that the latest round of talks between the two countries "have confirmed the need to upgrade our relations in all sectors" including in the area of "exchange of information" - the issue that led to the blacklisting of Cyprus by the Russian tax authorities earlier this year. However he made no specific mention of the blacklist, or of Cyprus's removal from it any time soon.
Russia added Cyprus to its blacklist, along with 53 other countries, on the grounds that it was an ‘unco-operative territory’. This blacklist was part of an amendment to the Russian tax code which introduced a tax exemption on the repatriation of dividends from foreign subsidiaries of Russian companies under certain circumstances. Russian subsidiaries based in territories and countries on the so-called blacklist were not included in the exemption.
Many European countries such as Ireland, Luxembourg and Switzerland successfully lobbied the Russian government to be removed from the blacklist, but Cyprus remains due to its apparent failure in the past to fulfil requests for information from the Russian tax authorities in certain cases.
Given the level of Russian business being routed through Cyprus - in 2006, 21.6%, or USD28bn, of the USD130bn total accumulated investments in Russia came via Cyprus, thanks in part to a favourable tax treaty - the appearance of the blacklist initially caused alarm bells to ring within the Cypriot financial services industry. However, tax experts quickly played down the impact of the Russian move, pointing out that it is designed to catch repatriation of dividend payments from foreign subsidiaries of Russian companies, when in fact most Cypriot holding companies receive dividends from Russia as opposed to paying dividends to Russian companies, therefore completely avoiding taxation.
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