On the 25th of March 2020, the Russian president Mr. Vladimir Putin, announced the support measures to be provided to tackle the impact of COVID-19. In addition to the announced measures, Mr. Putin also announced the increase of a number of taxes, including a significant increase in the withholding tax applicable to dividend and interest payments made to recipients abroad. For such an increase to become applicable, the double tax treaties that the Russian Federation currently maintains with the various jurisdictions will have to be changed. In his speech, Mr. Putin mentioned that Russia will unilaterally terminate the double tax treaties with countries which did not agree to the aforementioned amendments.
On 1 April 2020, Cyprus became the first country to be notified by the Russian Ministry of Finance of its proposition to increase the withholding tax rate on interest and dividends to 15% or terminate the double tax treaty in the absence of a positive response by 15 June 2020. The reasoning of the choice of Cyprus as the first country to be notified is obvious when considering that 34% of the cumulative direct foreign investment in the Russian economy comes from Cyprus (as per the Russian embassy’s statement to the Cyprus News Agency).
If the Cyprus Government is to accept the proposition of the Russian Federation, a 15% withholding tax will be applied for the payments of dividends and interests made from Russia to Cyprus (or 20% in the case whereby the recipient is not the beneficial owner of the interest). Should the Cyprus Government refuse the proposition, there will be no mechanism in place to avoid the payment of double taxation. Further, tax of 15% and 20% will be withheld respectively on dividends and interest, whilst other income sourced in Russia will be subject to the local tax in Russia of 20%.
It is expected that more countries will receive similar notifications for amendment of their double tax treaties by 24 April 2020, which is the deadline the Russian Government set to the Ministry of Finance for delivering proposals for the increase of withholding tax rates.
Our Firm closely monitors all developments on the matter and this article will be updated accordingly. We recommend monitoring these events and assessing in advance whether the actions described above could adversely impact your business. It is clear that these changes will require a review of both ownership structures and financing models.