Article 10 of the double tax agreement between Cyprus and Russia(1) provides that withholding tax payable on dividends paid by companies resident in one state to shareholders resident in the other is capped at 5% of the gross dividend, provided that the beneficial owner of the dividends is a resident of the other state and has directly invested the equivalent of at least €100,000 in the capital of the company paying the dividends.
In practice, the provision applies only to dividends paid by Russia-resident companies to Cyprus-resident shareholders, since Cyprus imposes no withholding taxes on dividends.
Proper structuring is important to ensure that the double tax agreement's strict requirements are observed. This was illustrated by the denial of the preferential 5% rate on dividends paid by Severstal PJSC to its four Cyprus-resident shareholders. The Russian tax authorities successfully argued that Cyprus-resident companies Rayglow Limited, Loranel Limited, Astroshine Limited and Pearlgreen Limited, which were owned by BVI-resident companies, were conduit companies established with the main objective of ensuring a favourable tax regime. The court clarified that a shareholder which is merely a custodian or transfer agent is not the beneficiary of the income.
The Russian tax authorities contended that Severstal should have withheld tax at 15% and not 5% and raised assessments of Rb696 million for the shortfall in withholding tax and late payment charges and penalties of Rb286 million, the equivalent of $17 million in total.
The 2010 protocol to the agreement introduced a limitation of benefits clause for the first time, which – together with the Russian authorities' more assertive stance regarding the interpretation and enforcement of legislation over the past few years – has made the scrupulous observation of the provisions of the agreement essential in order to enjoy the considerable benefits that it provides.
For further information on this topic please contact Philippos Aristotelous at Andreas Neocleous & Co LLC by telephone (+357 25 110 000) or email (email@example.com). The Andreas Neocleous & Co LLC website can be accessed at www.neocleous.com.
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