Tax News: 08/2023

On 8 August 2023, Russia published the Presidential Decree No. 585 ‘On the Suspension of the Validity of Certain Provisions of International Treaties of the Russian Federation on Taxation Issue’ (‘the Decree’). The Decree suspended unilaterally certain main articles of 38  Double Tax Treaties (‘DTTs’) concluded by Russia with so-called “unfriendly” states, including Cyprus.

The Decree was issued as a response measure to the “unfriendly actions” taken by these states against Russia in relation to the war in Ukraine.

The suspension of the DTTs comes into force immediately after the publication of the Decree, i.e., the new tax regime applies to income paid starting from 8 August 2023.

The suspension concerns the DTT articles allocating the rights of the Contracting States (i.e., Russia and Cyprus) to tax all types of income and capital. Consequently, it will not be possible to apply reduced tax withholding rates and tax exemption in respect of passive income, income from employment, professional and other similar activities.

Auxiliary DTT provisions concerning general definitions, tax residency rules, mechanisms for eliminating double taxation, rules on the exchange of information and others remain in effect. The application of these auxiliary articles in practice will however depend on the position of the states with which Russia has suspended the DTT articles.

As most of the DTTs mentioned in the Russia Decree are based on the OECD Model Tax Convention, the consequences of the suspension of the DTT provisions are similar for all the concerned countries. The only exception relates to the US-Russia DTT as this is not based on the OECD Model Tax Convention.

Impact on Cyprus

Specifically for the Cyprus-Russia DTT, the Articles suspended are the following:  Articles 5-22, 24, 27 and 29.

As a result of the suspended Articles, Cyprus entities receiving dividends, interest, royalties, or other income subject to withholding tax from Russian entities will no longer be entitled to the preferential withholding tax rates and/or exemptions as stipulated by the respective DTT. Instead, withholding tax will be applied at the rates as specified in the Russian Tax Legislation. Specifically, the tax rates on income as per the Russian Tax Legislation are as follows:

• Dividends – 15%
• Interest, royalties, and other income subject to withholding tax – 20%.

Our firm’s tax team is at your disposal for any further information or assistance you may need in relation to the above.