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Pepeliaev Group advises of the amendments to the double taxation treaties with Cyprus and Malta and the increase of tax rates for dividends and interest
The protocol amending the double taxation treaty with Cyprus has been signed and awaits ratification. Signing the Protocol with Malta is coming up next. The provisions of this Protocol differ from the one with Cyprus with regard to the taxation of interest. Dividends and interest on loans paid from Russia will now be taxed at the increased rates and the benefit will apply only to a limited number of residents who are beneficial owners of income (BOI).
We have prepared a comparative analysis of the amendments:
|
Tax rate |
Cyprus |
Malta |
Our comment |
|
Dividends | |||
|
15 % |
General rule |
| |
|
5 % |
For residents meeting the BOI criteria:
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The Protocol does not specify the stock exchange on which the shares of the recipient of the dividends should be traded. In view of this, we believe that the beneficial rate should apply if the company's shares are traded on a foreign stock exchange. Only the Central Bank itself (but not the branches or units of it, or any other banks) is specified as being entitled to the benefit with respect to receiving dividends (similarly to receiving interest). | |
|
Interest |
| ||
|
15 % |
General rule |
| |
|
5 % |
A public company whose shares are traded on a stock exchange with not less than 15% of its voting shares being circulated freely and that has been a direct owner of not less than 15% of the capital of the payer of the dividends for not less than 365 days;
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The same conditions as for the dividends and additionally:
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The treaty with Cyprus retains more benefits for the payment of interest than the one with Malta. For example interest paid to foreign banks as well as interest on euro bonds will remain exempt from tax in Russia (provided that the BOI is confirmed). |
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0 (exemption in Russia) |
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As one can see, structuring business for many years to come using Cyprus or Malta (and soon, Netherlands as well) is becoming for Russian taxpayers not simply unprofitable but wasteful. The Protocols will be applied starting from 1 January 2021. It means that dividends and interest paid starting from the next year will be taxed in Russia. In view of this, many companies that transfer profit from Russia primarily as interest and dividends are seriously thinking about changing the jurisdictions. However, it is not a universal remedy because once the Multilateral Instrument (MLI) comes into force in 2021, such “relocations” will be tested closely by tax authorities for the existence of a business purpose (PPT).
Using a pass-through approach is not a universal solution either because not all are ready to refuse from the status of a beneficial owner of income and certain jurisdictions understand the concept of a beneficial owner of income very differently than Russia. Talking about the Russian holders of foreign structures, starting from 2024 it is planned to cancel the zero tax rate on dividends paid to Russian parent companies. For the same reason, it is likely that foreign companies voluntarily becoming Russian residents will not be as pertinent as it used to be.
A good alternative may be a “relocation” to a Special Administrative Region, but it is hard to say at this point how and how well it will work. A specific decision about the business restructuring should be made individually in each case, taking into account the specific aspects of the business and the asset structure.
Pepeliaev Group's team has a broad experience in the area of taxation, including in cross-border transactions. Drawing from it, our lawyers can help our clients perform a comprehensive analysis of the business structures, develop the most suitable options for the (re)organisation of their businesses taking into account the specific characteristics of them and evaluate the benefits and shortcomings of the solutions developed by the client.
[V.1]https://www.investopedia.com/terms/g/government-bond.asp
