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Cyprus: Russia’s deoffshorisation law and Cyprus companies

Katerina A Charalambous
Cyprus companies have a long history of presence in Russian structures. Russia's deoffshorisation law and, more specifically, the introduction of controlled foreign company (CFC) rules which was set to prevent the shifting of profits to preferential tax jurisdictions and re-route funds back to Russia could also affect the domination of Cyprus companies in such structures.

Nonetheless, as it is construed from the aforementioned legislation, nothing is black and white and each case must be viewed on its own merits. In the same vein, the Russian Ministry of Finance has recently clarified the criteria upon which profits of a Cyprus company shall be exempted from Russian taxation. The Ministry has clarified that companies whose large majority of income (more than 80%) is active shall be exempted. However, the active companies' test is not expected to be straightforward, with the list of passive income to include dividends, interest and royalties as well as rental and lease income and income from the provisions of consulting, marketing, legal and other services.

Further, the Ministry of Finance notes that the effective tax rate test whereby companies registered in jurisdictions which exchange information with Russia and impose an effective tax rate equal to, or higher than, 75% of the average tax rate that would have been imposed in accordance with the Russian tax legislation, must also be considered for the purpose of determining whether the profits of the Cyprus company are exempted from Russian taxation. The exchange of information for tax purposes between the two jurisdictions is accomplished based on the Russia – Cyprus tax treaty (income and capital tax) now in force.

The various international tax developments taking place have also urged Cyprus to re-examine its tax regime to catch up and radical changes could be on the horizon. Legislative changes that are expected to reaffirm Cyprus's attractiveness as an international business centre are expected to be presented to the Council of Ministers and implemented soon.

Katerina A Charalambous (katerina.a.charalambous@eurofast.eu)
Eurofast, Cyprus Office
Tel: +357 22 699 222
Website: www.eurofast.eu

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