On October 9th, 2015, the Ministry of Finance (MoF) of Russia, issued Letter No. 03-08-13/57909 in order to provide further clarification on the application of the reduced withholding tax rate on dividends in accordance with Article 10 of the Double Tax Treaty between Russia and Cyprus. The letter relates to Letter No. 03-08-05/49439 issued on October 2nd, 2014 on the same topic.
In particular, Article 10 of the Treaty stipulates that dividends paid by a Russian tax resident company to a Cyprus tax resident company are taxed in Russia, yet the withholding corporate income tax rate on these can be set at only 5% provided that the Cyprus company (the beneficial owner of the dividends) has already directly invested into the capital of the Russian dividend-paying company a minimum amount of 100,000 Euros or equivalent. Furthermore, this threshold is set at USD 100,000 for periods prior to January 1st, 2013, while it was also made clear that up to December 31st, 2012 the advantageous 5% withholding tax rate will continue to normally apply to the dividends when the direct investment amounts to at least USD 100,000.
Moreover, on the basis of the Memorandum of Understanding between the two countries signed on August 10th, 2001 following bilateral consultations between the competent authorities of Russia and Cyprus, the MoF further clarifies that the terminology ‘direct investment’ refers to the acquisition of shares in a company in any manner, including an initial offering, subsequent offering, via stock exchange markets, or even direct acquisition from a previous owners. Additionally, the direct investment should be calculated as the actual amount effectively settled by the investor on the day the shares were acquired, and this amount is not allowed to be subsequently recalculated on the rationale of future foreign exchange rate fluctuations.
Additionally, in the occasion of initial or subsequent offerings, the amount of the direct investment is determinable on the exact date the Cyprus resident company makes the contribution to the share capital of the Russian Company, while in cases of an acquisition of shares via a secondary market, the amount is determined based on the acquisition date as long as the shares sale / purchase transaction is in line with the arm’s length principles.
As a final note and in relation to the practical aspect of this relief, the MoF denoted that for the reduced 5% withholding corporate income tax rate to be applied, the taxpayers need to submit all the supporting documentation proving and confirming the act of the direct investment in the Russian companies, to the tax offices in charge. Conclusively, this documentation is expected to include all pieces of information related to the invested amounts, including, for example, corresponding shares sale and purchase agreements and their matching bank statements.
Cyprus is a well-established international business and financial centre due to the many favorable tax incentives it offers, its extensive Double Tax Treaties network, as well as its EU membership and its compliance with EU and OECD standards placing the island amongst the most favorable holding company jurisdictions.
Here at Eurofast our tax specialists, teaming up with our Taxand colleagues in Russia as well as in other countries across the globe, are ready to assist you by providing all proper guidance and consultation on the implementation of MoF Letter 03-08-13/57909 and by advising you towards ensuring tax benefits for your multi-jurisdictional corporate structures.
Christiana Nicolaou
Tax Consultant
E: christiana.nicolaou@eurofast.eu