Cyprus: Reduced withholding tax rate on dividends from Russia to Cyprus
On October 9 2015, the Russian Ministry of Finance (MoF) issued Letter No. 03-08-13/57909 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 provides an update to Letter No. 03-08-05/49439 issued on October 2 2014.
In particular, article 10 of the treaty denotes 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% on the provision and prerequisite that the Cyprus company, being the beneficial owner of the dividends, has already directly invested into the capital of the payer of the dividends, that is, the Russian company, a minimum amount of €100,000 ($111,000) or equivalent. This threshold is instead set at $100,000 for periods before January 1 2013, while it was also made clear that up to December 31 2012 the advantageous 5% withholding tax rate will continue to normally apply to the dividends when the direct investment amounts to at least $100,000.
Moreover, on the basis of the memorandum of understanding (MoU) signed between the two countries on August 10 2001 after bilateral consultations between the competent authorities of Russia and Cyprus, the MoF further clarifies that the terminology 'direct investment' equates 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 previous owners. Additionally, the direct investment should be presented as the actual amount effectively settled by the investor on the day the shares are 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 company makes the contribution to the share capital of the Russian company; while where there exists an acquisition of shares via a secondary market, the amount is determined based on the acquisition date as long as the share sale/purchase transaction is in line with the arm's-length principle.
As a final note, when it comes to the practical aspect of this relief, the MoF denoted that for the reduced 5% withholding corporate income tax rate to be duly applied, taxpayers need to file with the tax offices all the supporting documentation proving and confirming the act of the direct investment in the Russian companies. Conclusively, this supporting documentation is expected to include all information related to the invested amounts, with some examples being the corresponding shares sale and purchase agreements and their matching bank statements.
Christiana Nicolaou (firstname.lastname@example.org)
Eurofast Taxand Cyprus
Tel: +357 22 699 143