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Cyprus-Russia Tax Deal in Trouble

Cyprus-Russia Tax Deal in Trouble

In a surprising turn of events for the Cypriot government, Russia is looking to scrap its tax deal with the EU member state after a series of negotiations aimed at reforming the agreement turned sour.

According to Reuters, the Putin government believes terminating the tax deal “could encourage Russian businesses registered on the island to transfer soon-to-be unprofitable holding structures back home,” which would in turn hinder the island’s economy.

In light of dropping oil prices, the ongoing pandemic and a need to curtail capital outflows, the Russian government has suggested implementing, as of the first of January, 2021, a 15 percent levy on all interest and dividend payments leaving the country.

Russian Deputy Finance Minister Alexei Sazano said the discussions with the Cypriot government had broken down and Russia would move to remove itself from the current double tax treaty.

“Restructuring one’s holding structures through Cyprus will of course become disadvantageous. It will be more advantageous to transfer everything back to Russia,” he said.

Tax analysts also believe it will be a whole less profitable for Russian companies to set up in Cyprus if Russia abandons the tax treaty.

In a statement following a preliminary series of discussions, the Russian Finance Minister said: “Cyprus had put forward its proposals, which the Russian ministry of finance considered to be eroding the actual effect of the measures taken by the Russian side to support the national economy.”

Foreign firms established in Russia are also paying close attention to this news as it may affect tax planning between Russian subsidiary and parent companies.

Cyprus-Russia Tax Deal

Speaking to The Moscow Times, Tadzio Schilling, CEO of the Association of European Businesses (AEB), said, “This is an issue which is very important, and we are following it very closely.”

“We need to make sure that by doing what they want to do, or by achieving what they want to achieve, there is no collateral damage.”

The Cypriot government was caught by surprise by this announcement and reiterated that negotiations between the two trade partners are set to continue on the 10th and 11th of August.

A Russian government spokesperson confirmed this to the Cyprus Mail and said a “large delegation” will be involved in these discussions and hopefully hammer out a solution.

Local financial service providers are also concerned with what’s at stake for the Cypriot economy.

In a Cyprus Mail article, Spyros Ioannou, who heads the tax division at Primus, said the largest impact of a failure in the upcoming discussions would “be a loss of substantial tax revenue for the government.”

“A large part of these funds are used for lending,” Ioannou told the Cyprus Mail. “These loans are taxed at 12.5 per cent, so the loss of this tax revenue will make a difference.”

 Ioannou, however, remains positive, adding, “There is still hope that Cyprus can gain some of its objectives at the negotiating table – it does seem, however, that the Russians want some kind of quid pro quo for agreeing to Cypriot requests.”

Ultimately, Ioannou believes these sorts of moves might affect the stability offered by the Cypriot economy.

“With this kind of change underway, it is more difficult for businesses to come to Cyprus, to bring money here, to establish businesses here. A stable fiscal environment has been one of the selling points for Cyprus – let us hope this will not change,” Ioannu concluded.

The Moscow Times reports that according to Russian governmental sources close to 27 billion dollars were funneled in 2019 by Russian companies and individuals into Cyprus.