Russia To Remove Cyprus From Tax 'Blacklist'

by Tatiana Smolenskaya, Tax-News.com, Moscow

20 April 2009

Russia and Cyprus have signed a new double taxation avoidance agreement which should finally secure Cyprus's removal from the notorious Russian 'blacklist' of jurisdictions which have not demonstrated a sufficient level of cooperation with the Russian tax authorities.

The protocol, the result of several years of hard bargaining, was signed in Nicosia by Finance Minister Charilaos Stavrakis and Ilya Trunin, a senior tax official in the Russian Finance Ministry.

The existing tax treaty between Russia and Cyprus has been one of the major reasons for the huge flow of Russian investment through the Mediterranean island in recent years. In 2006, 21.6%, or USD28bn, of the USD130bn total accumulated investments in Russia came via Cyprus, while Russian deposits in Cypriot banks are said to exceed USD26.35bn.

However, in December, 2005, then head of the Russian tax service, Anatoly Serdyukov, announced that double taxation avoidance agreements would be reviewed to prevent companies from avoiding tax by registering offshore, and to "protect Russia's economic interests". According to Serdyukov, the federal budget was deprived of more than USD2bn in unpaid profit tax by oil firms during 2004 because the owners of these firms were resident for tax purposes in low tax jurisdictions, such as Cyprus.

Last year, Russia added Cyprus to a 'blacklist' of 54 countries, on the grounds that it was an ‘uncooperative 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 remained on the list due to its apparent failure in the past to fulfil requests for information from the Russian tax authorities in certain cases. According to Stavrakis, Cyprus's name will be erased from the blacklist once the new protocol is fully ratified by both parties, thanks in large part to a commitment by Nicosia last year to improve exchange of information provisions.

Stavrakis said that the new agreement maintains "the very low and competitive factors Russians are enjoying today concerning investments through Cyprus" although he conceded that Russia succeeded in winning "a significant number of concessions" that they had been asking for.

A major concession won by Russia will see capital gains made by Russian subsidiaries of Cypriot holding companies with more than 50% of their assets in Russian property taxed at the prevailing rates in Russia.

Trunin remarked that the amendments ensure that the double tax agreement will not be used "in an inappropriate way" by residents and investors in Cyprus and Russia, but would nevertheless result in Cyprus's removal from Russia's "list of offshore jurisdictions" which he stopped short of calling a "blacklist."

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