How will changes in Cyprus' taxation affect Russian businesses?

Change in dividend tax in Cyprus

In Cyprus, a decision has been made to increase the tax on dividends coming from Russia. As a result of negotiations between the two countries, an agreement has been reached to change the terms regarding double taxation; however, its cancellation did not take place. Specialists from an international real estate brokerage are analyzing how these changes may affect the residential and commercial real estate market in Russia.

Context of the situation

To better understand the current situation, it is important to pay attention to the events leading up to this decision. At the end of March this year, the President of Russia, Vladimir Putin, proposed introducing a tax on dividends sent abroad. In response, the Russian Ministry of Finance began negotiations with Cyprus to update the existing double taxation agreement. The Cypriot authorities put forward a number of conditions that, according to representatives of the Ministry of Finance, could significantly reduce the effectiveness of the proposed initiatives aimed at supporting the domestic economy and social programs.

Official statements and compromises

On August 3, the Russian Ministry of Finance published a statement about plans to suspend the agreement with Cyprus, which allowed for significant reductions in dividend taxes—from 15% to 5% or 10%—and on loans—from 20% to 0%. However, after several rounds of negotiations in the capital, a compromise was reached that took into account the interests of both parties. Starting next year, the tax rate on dividends and interest will be set at 15%. Nevertheless, more favorable rates of 0% and 5% will be established for pension funds, insurance companies, and other organizations whose shares are listed on stock markets.

Analysis of the impact of changes on business

Analysts have prepared tables illustrating the potential consequences for Russian businesses. This analysis is important as changes in taxation affect key aspects of financial flows. For example, the tax on interest paid from Russia will be 15% in general from 2021, except for certain categories for which the rate will remain at 0%.

Dividends and new tax rates

As for dividends, starting from the beginning of next year, the tax rate on them will change. In general, it will be set at 10%, but for those who have invested at least 100,000 euros in the capital of a company that pays dividends, the tax will be set at 5%. These preferential conditions also apply to public companies that meet certain requirements and have significant participation from Russian investors. A 5% rate will also be established for dividends received by pension funds and insurance organizations.

Financing process for companies

If we take a closer look at the financial processes for firms, we can conclude that there will be no significant changes for individuals and companies receiving funds from Cyprus. According to lawyer Ekaterina Shabalina, this change will not have a critical impact on most entities working with Cyprus. Overall, the current situation opens new horizons for the Russian economy, as comprehensive tax measures require careful analysis of various operations and transactions in order to successfully adapt to the newly established conditions.

Investment structure in Cyprus

In the overwhelming majority of cases, the structure related to investments in Cyprus looked as follows: a holding company was established in the country, with its shares owned by a non-resident.

Conclusion

In conclusion to our discussion on the changes to the double taxation agreement between Russia and Cyprus, it is worth noting that despite the emergence of new tax conditions, many aspects related to investments and real estate purchases remain quite stable. Cyprus's agreement to increase the tax on dividends and interest reflects not only economic realities but also the desire of both countries for more productive cooperation.

As I mentioned before, the changes coming into effect on January 1, 2021, imply that the dividend tax will increase from5%to15%However, for certain categories, such as pension funds and insurance companies, the advantages still remain. This is important for investors who are planning to participate in the Cypriot real estate market or use Cyprus as a platform for other investments.

At the same time, the changes will not have a significant impact on the decisions of Russian investors regarding the purchase of real estate in Cyprus. The preservation of favorable tax conditions for certain investors may still open doors for potential deals. In particular, citizens who are considering options for obtaining citizenship or permanent residency through real estate acquisition will be able to continue their investments without substantial additional tax costs.

Key points of the changes

• Increase in the dividend tax from5%to15%.
• Preserving benefits for pension funds and insurance companies.
• There is no significant impact on real estate purchases by Russian citizens.

Thus, it is worth considering this postponement of timing and tax changes as a step towards greater economic cooperation between Russia and Cyprus, which may have positive implications for businesses and private investors. Ultimately, we see that in a changing economic environment it is important to keep a close eye on new legislative initiatives and adapt your strategies to minimize tax risks and maximize opportunities.