Since Cyprus-resident companies are commonly used to hold shares in Russian-resident companies, claims for the reduced rate of withholding tax on dividends have been the most common area of dispute under the Cyprus-Russia double tax agreement.
The agreement provides that a reduced rate of withholding tax applies to dividends paid by a company resident in one contracting state if the beneficial owner of the dividends is a resident of the other contracting state and has directly invested the equivalent of at least €100,000 in the capital of the company paying the dividends. Before January 1 2014, when the 2010 Protocol to the double tax agreement took effect, the minimum investment amount was $100,000.
The most recent challenge regarding a claim for reduced withholding tax relates to dividends paid by Russian company Open Joint Stock Company Iliyushin Finance Co to its Cyprus shareholder Starberry Limited. In this case, the shares were purchased through a broker in 2013 through the shareholder's depository account. The Russian tax authorities disputed that the conditions for a reduced rate of withholding tax had been met on the grounds that there was insufficient evidence of the investment. Further, there were no written instructions from Starberry Limited to the broker to purchase the shares and no payment documents confirming that funds had been transferred to the broker to purchase the shares (the price was settled on Starberry Limited's depository account). Consequently, the Russian tax authorities contended that there was no direct investment which met the conditions for the reduced rate of withholding tax set out in the double tax agreement.
The dispute ultimately fell to the Russian courts to adjudicate and in December 2016 the court concerned found in favour of the taxpayer on the grounds that:
- there is no legal requirement to make a written order for each transaction in securities; and
- genuine capital investment had taken place through repeated share purchase transactions.
The double tax agreement does not require a minimum holding period and neither the double tax agreement nor Russian law generally prohibits obligations being met by set-off, as was the case here.
This dispute confirms the Russian tax authorities' increased readiness to challenge claims for relief. It also underlines the importance of careful structuring to ensure that all the conditions required to qualify for relief under the Cyprus-Russia double tax agreement are met.
For further information on this topic please contact Philippos Aristotelous or Elena Oratis at Elias Neocleous & Co LLC by telephone (+357 25 110110) or email ([email protected] or [email protected]). The Elias Neocleous & Co LLC website can be accessed at www.neo.law.