In what could be 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 see 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.
Long trying to fight a reputation as a tax haven and place for criminals and shady businesses to hide and launder money, Cyprus has been trying to reform the banking system which nearly brought down the economy in 2013.
That was over big losses in the holdings of Greek bonds devalued 74 percent during that country's economic and austerity crisis, and bad loans given Greek businesses requiring Cyprus to seek a 10-billion euro ($11.84 billion) international bailout.
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 President Vladimir 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.
Russia's Deputy Finance Minister Alexei Sazanov said talks with Cyprus on changing the agreement to meet Putin's demand had failed and the process of withdrawing from the double taxation deal would begin.
“Restructuring one’s holding structures through Cyprus will of course become disadvantageous. It will be more advantageous to transfer everything back to Russia,” Sazanov said in a statement, the news agency reported.
Russia was working on improving its legislative framework to facilitate the transfer of holdings to Russia, he added but the end of the talks will mean a difficult road for Russian businesses.
Irina Bykhovskaya, a partner at Ernst & Young in Moscow, said the changes will bring a totally different approach to calculating profits and making payments by January 1 of the next year.
Cypriot officials surprised by the news said the talks were continuing when the Russians said they weren't for now.
“The Ministry of Finance states that the final round of negotiations has been scheduled for the 10th and 11th of this month,” an announcement from the Cypriot ministry said, to be led by the Finance Minister, Constantinos Petrides.
A senior Cypriot official earlier told Reuters the move had caught the government offguard, believing the provisions Putin insisted upon were still in the talking stages.
Cyprus had expected any conclusion to be finalized in early September, when Russian Foreign Minister Sergei Lavrov is due to visit, the official said, without being named.
“We have set some positions and we are seeking continuity of contacts and agreement, since we did not formally agree on a shipwreck,” said another Cypriot source familiar with the discussions, also not identified.