Following the negotiations by the Ministries of Finance of the Russian Federation and Cyprus, a new Protocol has been agreed which will amend the provisions of Article 10 – Dividends and Article 11 – Interest. Article 12 Royalties will remain unaffected and the 0% withholding tax rate will continue to apply.
According to the press releases of the two sides, the standard rates of withholding tax on dividend and interest payments will be increased to 15% (previously, dividends were taxed at 5%/10%, and interest at 0%).
The said Protocol is expected to be signed in autumn of 2020 and will be ratified before the end of 2020. The above amendments will be effective from 1 January 2021.
The two sides have also agreed to certain exceptions to the standard rates which will allow for certain categories and certain types of income to be taxed at a lower rate.
Exceptions from the 15% standard rate
Dividends (Article 10)
Dividends may be taxed at a 5% withholding tax rate, where the recipient/beneficial owner of the income is:
Interest (Article 11)
Withholding tax rate of 0% shall apply if the recipient/beneficial owner of the income is:
Interest may be subject to a 5% withholding tax rate, where the recipient/beneficial owner of the income is a Publicly Listed Company (holding of at least 15% throughout a 365 day period and free floating of at least 15% required).
It should be noted that any tax withheld at source at the level of the Russian Federation, can be credited against the Cypriot tax payable on the same income, if any, in Cyprus.
The amended withholding tax rates on dividend and interest are in line with the publicly announced intentions of the Russian Federation to tackle the adverse economic effects of Covid-19.
The Russian Federation is in the process of negotiating similar provisions with other treaty partners (e.g. Luxembourg, Malta and The Netherlands) as to ensure a level playing field among its European partners.