Russian business working with offshore companies through Cyprus faces not only a sharp increase in the tax burden, but also double taxation. Negotiations on changing the tax agreement with this country have reached an impasse so far and it can be terminated, a federal official and several consultants who were aware of this from officials told Vedomosti.
Cyprus is the most popular low-tax jurisdiction among Russian business, through which capital is transferred to offshore and back to Russia. According to the Central Bank, in 2019, Russia invested $ 14.5 billion in Cypriot companies, and received $ 8.1 billion in direct investments. The agreement with Cyprus allows reducing taxes on dividends and interest paid on loans to 5 and 0% from 15 and 20%, respectively. The decades-old schemes have ceased to suit the Russian authorities. President Vladimir Putin demanded from 2021 to increase rates in tax treaties to 15% or terminate them. The second option threatens an agreement with Cyprus.
The Cypriot Ministry of Finance has not yet agreed to revise the agreement, say Vedomosti interlocutors. According to one of the consultants, Cyprus proposed to maintain rates by tightening control over the foreign structures of Russian business so that technical layers could not save on taxes. The Russian Ministry of Finance has received confirmation that its proposals are being considered, there is no turning back, and if negotiations come to a standstill in the coming months, Russia will be forced to initiate adoption of laws to denounce the agreement in the fall, a ministry spokesman said. The representative of the Cypriot Ministry of Finance did not respond to a request from Vedomosti.
A rupture of the agreement threatens an even greater increase in tax costs than its revision. The burden on royalties paid to Cyprus will increase dramatically. It was not proposed to increase royalty tax rates in the agreement, but without the agreement they would be 20%. The owners of patents and trademarks, which are now transferring them under license agreements, will suffer Alexander Tokarev, Director of the Tax and Legal Advice Department of KPMG in Russia and the CIS. However, abundant jurisprudence shows that dividends to foreign parent companies are often disguised as royalties.
The business, the financing of which went through Cyprus, will also suffer, because with the break of the agreement, taxes on interest on loans will grow to 20%, and not up to 15%, says Natalia Kuznetsova, partner of Deloitte. When organizing financing through Cyprus, such taxes were not laid down in the structure of the transaction and, most likely, will become an additional burden for Russian borrowers, and not foreign lenders. The costs of the transportation business and companies leasing vessels will also increase. The presence of a foreign company is often necessary for them, but if now you do not need to pay tax on such income in Russia, then without an agreement they will be taxed at the rates of 10 and 20%, respectively, explains Tokarev. And Russian companies receiving dividends from Cypriot subsidiaries,
For some companies and people, breaking the agreement will result in double taxation. In this case, in addition to the Russian tax, interest and royalties will have to pay another tax in Cyprus at a rate of 12.5%, but Cyprus will not pay tax on dividends, Kuznetsova says. At the same time, for royalties and interest there is an opportunity to apply special tax regimes and lower the effective rate, she notes, and even if there is no agreement, in principle, the tax withheld in Russia, most likely, can be offset in some part.
The Russians who transferred money to Cypriot brokerage companies will not have to pay tax on it when they receive income, says Pavel Romanenko, Ronlaw partner. But, according to him, tax residents of Russia, who receive a salary in Cyprus or own real estate in Cyprus, may suffer – when selling it, you will have to pay tax in both countries.
The absence of an agreement with Cyprus may lead to the inclusion of the country in the black lists of the Russian Ministry of Finance and the Federal Tax Service (FTS). For example, if, in response, Cyprus ceases to share tax information with Russia, Tokarev explains. Because of this, the tax burden on owners of controlled foreign companies (CFCs) in Cyprus may increase, Lazorina warns. If the effective rate at which the CFC pays tax abroad is not much lower than the Russian one (at least 75% of the weighted average rate), you do not need to pay tax in Russia. But if the CFC works in the country from the black list of the Federal Tax Service, you will have to pay tax in any case. In addition, control over the operations of companies from the point of view of transfer pricing as a business from an offshore jurisdiction will strengthen, says Lazorina.
For business, the news will not come as a surprise, says Crow Expertise partner Rustam Vakhitov, companies have also considered such an option. But Russian and international groups themselves are interested in maintaining the agreement, otherwise the country will become less attractive for cross-border business – paying dividends and interest to the country will become more expensive, he explains.
The business began to think about how to maintain the benefits of paying dividends immediately after Putin’s statement. One option was to use a “cross-cutting” approach. For this, the foreign entity must declare that the actual recipient of the dividend income is not she, but another person, for example, a Russian company. And then you can apply Russian rates – for example, 13% of personal income tax or 0% of dividends (the Ministry of Finance has already prepared amendments that deprive companies of the opportunity to try on this benefit with a cross-cutting approach).
The business does not have many options – to look for alternative jurisdictions, such as the Netherlands or Switzerland, to transfer foreign structures to Russia, including to special administrative areas (similar to offshore companies – Vedomosti), Kuznetsova lists. Agreements with the most popular jurisdictions can also be reviewed or terminated, says Marina Belyakova, EY partner. Already in line are agreements with Malta and Luxembourg. Agreements with them can also be terminated if countries do not agree to the proposed changes, follows from the response of the representative of the Ministry of Finance. In the future, business will have to make a fundamental decision – to completely move to Russia or apply a cross-cutting approach, concludes Belyakova.
Vedomosti / Svetlana Yastrebova