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 constitutes furtherance to Letter No. 03-08-05/49439 issued on October 2nd 2014 and relating to the same topic.
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 pre-requisite that the Cyprus company, being the beneficial owner of the dividends has already directly invested into the capital of the payer of the dividends i.e. the Russian company, a minimum amount of EUR 100,000 or equivalent. Furthermore, this threshold is set at USD 100,000 instead, for periods prior to 1st January 2013, while it was also made clear that up to 31st December 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 10th August 2001 following bilateral consultations between the competent authorities of Russia and Cyprus, the MoF further clarifies that the terminology 'direct investment' equivalents 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 shares sale/purchase transaction is in line with the arm's length principles.
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, the 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 evidencing documentation is expected to include all pieces of information related to the invested amounts, with some examples being the, corresponding shares sale and purchase agreements and their matching bank statements.
Eurofast's take:
Cyprus is a well-established international business and financial centre due to the many favourable 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 favourable 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
