Withholding tax rates – no changes
One of the most beneficial as well as key aspects of the Double Tax Treaty (DTT) is the favourable withholding tax rates applying to cross-border payments of dividend, interest and royalties.
The business community has welcomed the very positive and important decision not to bring any changes to the current rates which continue to apply as follows:
New definition for dividends
The DTT clarifies that distributions from mutual funds and similar collective investment vehicles (other than real estate investment trusts or real estate investment funds or similar vehicles primarily investing in immovable property) will be subject to the normal withholding tax rates applying to dividends ie 5%/10%. This clarifies an uncertainty that existed regarding the withholding tax rates that should apply on such distributions.
The definition of dividends has also been extended to cover the distributions from shares held in the form of Depositary Receipts.
New definition for interest
The substantially aligned with the OECD definition of “interest” clarifies, inter alia, that the term “interest” also covers income from dept-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits but it does not include penalty charges for late payment or interest which is reclassified as dividends by virtue of other provisions.
Exchange of information
This article has been revised in line with article 26 of the OECD Model Tax Convention on Income and Capital and reflects the changes that have already been introduced in the Cypriot tax legislation since 2008.
The changes are towards alignment to OECD policy standards on fiscal transparency and exchange of information on taxation matters.
Limitation of treaty benefits
The limitation of benefits introduced does not apply to companies incorporated in Russia or Cyprus.
Limitation of benefits applies to tax residents of Russia or Cyprus which are not companies registered in either of the two states and only in case where the tax authorities of the two countries agree that one of the main purposes of the company was to obtain the benefits of the agreement.
Other changes
The DTT introduces a clarification of the existing “tie-breaker” clause in relation to residency so that in cases where the effective management cannot be determined, the tax authorities of Russia and Cyprus should consult between them and come to a mutual agreement in this respect.
The DTT extends the definition of Permanent Establishment to cover activities of an enterprise resident in one country though services performed by individuals present in the other country for more than 183 days in a 12 month period, with certain specific criteria having to be met prior to such services being deemed to give a rise to a Permanent Establishment in the other country.
Income received through a real estate investment fund or similar collective investment vehicle which is organized under Russian laws primarily for the purposes of investing in immovable property would be treated as “Income from Immovable Property” as article 6 of the DTT and may be subject to tax in the country where the immovable property is situated.
In general, capital gains from the disposal of shares remain under the exclusive taxing right of the country of residence of the seller.
The important change relates to disposals, by a resident of one country, of shares in companies which derive a substantial part of their value (more than 50%) from immovable property situated in the other country. In this particular case, the country in which the immovable property is situated will also have a right to tax the resulting gain. This change is in line with the OECD Model Tax Convention on Income and Capital. This change will come into effect four year after the date the Protocol will come into force i.e. it will be applicable from 2017.
Cyprus was removed from the so-called “black list” (Russian Ministry of Finance Order No. 108n of 13 November 2007), which currently lists 42 countries.
This means that the zero corporate profits tax rate applies to dividends received in Russia from Cypriot sources.
Sale of non-listed shares represent a significant change, for which taxpayers have been given a four-year grace period.
Starting from 2017, income of Cypriot companies from sale of shares of Russian companies owning Russian immovable property will be taxed in Russia.
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