Cyprus/April 2014 Russian Federal Arbitration Court adjudicates on the treatment of dividends received in case the shares were acquired through an exchange of shares deal Article 10(2) of the Agreement between the Republic of Cyprus and the Russian Federation for the avoidance of double taxation with respect to taxes on income and capital (as amended through 2010) provides that withholding tax on dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State shall not exceed 5% of the gross amount of the dividends if the beneficial owner has directly invested in the capital of the company paying the dividends no less than the equivalent of 100 000 Euro. The Russian Federal Arbitration Court of the East – Siberian Circuit issued on 6 February 2014 the Judgment No. A19-2735/2013 for the application of the reduced withholding tax rate, as per Article. 10 (2) of the Double Tax Agreement. In the case under scrutiny, Yanden Enterprises Limited, a Cypriot resident company, received shares of Sayanskhimplast LLC, a Russian resident company, through share exchange agreements. As consideration for the Sayanskhimplast LLC’s shares, Yanden Enterprises Limited transferred shares held in other two subsidiaries. As a result of these arrangements, Yanden Enterprises Limited became the sole shareholder of Sayanskhimplast LLC while the subsidiaries received participations in each other. In 2010 Sayanskhimplast LLC paid dividends to Yanden Enterprises Limited to which the Russian Company applied the reduced withholding tax of 5% pursuant to the Tax Treaty. The Russian tax authorities contested the application of the reduced withholding tax rate and claimed that Sayanskhimplast LLC unlawfully applied this rate because the direct investment requirement in the Tax Treaty, according to which Yanden Enterprises Limited should have directly invested in the capital of Sayanskhimplast LLC the amount equivalent to at least USD 100,000, was not met. The Court however opined that, based on article 7(3) of the Tax Code, “all unavoidable doubts, contradictions and ambiguities regarding the tax law should be construed in favour of the taxpayer”. It further explained that because the term “direct investment” is not determined clearly in the legislation, the Court rejected the arguments of the tax authorities that the acquisition of the shares of Sayanskhimplast LLC pursuant to the share exchange agreements cannot be considered a “direct investment”. The Court adjudicated, in support of the decisions of the Lower Arbitration Court of Irkutsk region and the Arbitration Court of Appeal, that Yanden Enterprises Limited could be deemed as directly invested into the share capital of Sayanskhimplast LLC the required amount and, consequently, was entitled to apply the reduced withholding tax of 5%. This important case highlights the beneficial provisions of the Double Tax Treaty between the two countries and re-confirms the numerous advantages of employing the Tax Treaty in international transactions. Finally, this conclusion sets a clearer guideline as to how the courts examine the particular merits of each case and constitutes a precedent to other arrangements of this type.