After Putin Push, Russian Firms Sending Profits to Cyprus Face Tax Hike

Αssociated Press

A woman walks along carry umbrella to counter scorching temperatures brought on by a week-long easterly heatwave in Cyprus capital Nicosia, Cyprus, Thursday, Sept. 3, 2020. (AP Photo/Petros Karadjias)

Russian companies who sent profits to holding companies incorporated on Cyprus will have to pay higher taxes under an agreement between the countries, a 5 percent jump on dividend payments.

Russian President Vladimir Putin has targeted profits to low-tax countries, saying it's unfair to let companies cut their tax bills by sending money abroad, The Moscow Times said.

He threatened to abandon long-standing double tax treaties should the other countries not agree to Russia’s terms and had ramped up the pressure on Cyprus, where there is a huge Russian presence.

In May, in what would have been a shock to Cyprus' economy already reeling over the COVID-19 pandemic and tourists shying away, Russia's Finance Ministry scuttled a deal aimed at avoiding double taxation, which could have seen Russian businesses registered there leave. 

The decision surprised Cypriot officials, the news agency Reuters said in a report on the unexpected development, the talks falling apart and then ending after discussions to make modifications didn't succeed before picking up.

Cyprus, with a laissez faire attitude toward regulation, use of English law and double taxation treaty with Russia has been a key destination for Russian entrepreneurs and companies to register there.

Russia's economy has been hit hard by COVID-19 and low oil prices, leading Putin to propose a 15% tax on all interest and dividend payments leaving Russia to combat capital outflows, starting Jan. 1, 2021.

He also warned that Russia would unilaterally withdraw from agreements with foreign partners who did not accept its suggestions, with Cyprus having huge deposits in its banks from Russians, and an influx of revenues from Russian businesses there.

Cyprus has proved a favorite destination for Russian firms to register holding companies due to its low taxes, status as an EU member, privacy rules and judicial system based on English law.

The island’s “golden passport” scheme has also been extremely popular among wealthy Russians looking to get an EU passport, the Times report noted.

A recent Al Jazeera investigation found more than 1,000 Russians, including high-profile business and political elites, obtained Cypriot citizenship between 2017-2019 by investing the required $2.5 million, mostly into real estate. 

The agreement with Cyprus was signed as part of Russian Foreign Minister Sergei Lavrov’s visit to Nicosia. A 15% tax will also be levied on interest payments from Russia to Cyprus, although there are a number of exemptions for state-linked institutions.

Tax experts at consultants PricewaterhouseCoopers estimate Russia could gain 150 billion rubles ($2 billion) in extra revenues per year from the new agreement, the paper added in its report.