At first glance the protocol is a simple case of updating the long-standing treaty and bringing certain definitions into line with the latest OECD double taxation treaty model. On the other hand it may be regarded as an attempt by Moscow to close what has hitherto been one on the most lucrative loopholes for Russian 9and other0 property speculators for many years.
Advantage: The new protocol includes the provision for the removal of Cyprus from the Russian blacklist. This means that dividends received by Russian companies from Cyprus subsidiaries will finally be able to qualify for the Russian dividend participation exemption. Subject to ratification, the protocol is expected to come into effect on 01/01/2010.
- Withholding tax remains at 0% on interest and royalties.
- The maximum withholding tax rate of 10% is reduced to 5% (if the beneficial owner has directly invested the capital of the company paying dividends a minimum investment equivalent to EUR100,000 (from $ 100,000 USD).
Capital gains on immovable property
- Companies which hold more than 50% of their assets in Russian immovable property will be taxed in the country where the property is situated.
- However this does not include gains from the alienation of shares listed on an approved stock exchange or from a corporate reorganisation and further does not include gains derived from a pension fund, provident fund or from the governments of either the Russian Federation or Cyprus.
- This provision will not come into effect until 2014 thus allowing time to prepare mitigating the tax implications of this change subject to requests from clients.
- 'Dividends' have been given a broader definition to include payments on shares of mutual investment funds or other similar collective investment vehicles and depository receipts for shares.
- 'Interest' now includes debt claims of any type (penalty charges for late payments or interest are classified as dividends).
- Where the 'effective management' of a person (other than an individual) cannot be determined: The competent authorities of the two countries will agree to reach a mutual decision on the matter at hand.
- The definition of 'Permanent Establishment' has been expanded to include the taxation of profits from services performed in one country by an entity of another country through an individual (s) present in the other country exceeding in aggregate 183 days in any 12 month period.
- Distributions from mutual investment funds are to be treated as dividends. This is a welcome change as dividends are subject to a maximum withholding tax of 10% whereas under current Russian law, distributions from mutual funds are subject to a 20% withholding tax.
Conclusion: The effects of the only major amendment being the capital gains tax amendment to be introduced in 2014 can be limited by seeking timely tax advice.
The treaty remains the most favorable double taxation treaty concluded with the Russian Federation and retains the attractive 5% withholding tax on dividends for investments equivalent to EUR100,000.