Russia and Cyprus: Re-defining Offshoring.

Paul Goncharoff

Cyprus has had the reputation for many years as the sunny, warm, go-to Mecca for Russian business, especially during the go-go perestroika years and up until the Cyprus 2012/13 financial crisis. In 2004, Cyprus joined the EU, the small wrench in the works is that EU rules do not concern the northern side of the UN-designated Green Line that divides the country, but no worries, these things tend to make a country focus on other opportunities.

Like other small countries with limited economic options and neighborhood instabilities, Cyprus built a financial sector geared to entice overseas money. Low taxes, light regulation, favourable tax treaties, British-style rule of law, and depositor guarantees as an EU member made it an attractive destination for Russian investors in the post-Soviet period.

In the Cyprus-Russia heyday up until 2012, it is estimated that Russian banks and corporates had $31bn on deposit. This is more than Cyprus’ annual GDP. Russian cross-border loans to Cypriot-based Russian companies added a further $30bn-$40bn. 

Russia, on the other hand, was stepping up the battle against offshorization of many Russian company ‘holdings’ that were registered and operational out of Cyprus, which effectively sidestepped contributing to the Russian treasury with any degree of largesse.

The news now is both Russia and Cyprus will continue to avoid double taxation, but Russia will now hike up the taxes that Russian companies have to pay on profits they send to their holding companies in Cyprus.

The bottom line is that most Russia-based firms will now have to pay a 15% tax on dividend payments and income from interest they send from Russia to Cyprus, up from previous rates of 5% and 0% for interest income. In short, Cyprus-based Russian entities will still be able to avoid double taxation but at a higher rate of 15%. It is estimated that Russia could gain about 150 billion roubles (€1.7 bln) in extra revenues per year from this new agreement, which comes into force this New Year 2021.

To be fair, Cyprus had a choice to accede to Russia’s wishes or to scrap the benefits of any treaty on double taxation. The choice was obvious. Nevertheless, Cyprus held out for some key aspects such as the exemption from a 15% withholding tax on dividends for regulated entities, such as pension funds and insurance companies, as well as listed companies. Additionally, interest payments from corporate and government bonds as well as Eurobonds are also excluded from the 15% withholding tax in this new Cyprus-Russia Double Tax Treaty.

Russia is putting its foot down on free-wheeling offshorization. Russia is also making similar agreements with Malta and Luxembourg and negotiating a similar deal with The Netherlands. In fairness, this levels the game by having similar tax and operational standards on the offshore playing field.

Paul Goncharoff

Moscow September 21, 2020