Cyprus: Cyprus: Practical applicationPractical application

of the new developmentsof the new developmentsand its impact on and its impact on

tax structuringtax structuring

Moscow, 25th June 2009

New Protocol

New Protocol to the Double Tax Treaty between Cyprus and Russia: Initialed on 16th April 2009, in Nicosia, Cyprus; Expected to be signed and ratified by the end of the year and

enter into force by 01/01/2010.

The Protocol brings significant changes via the incorporation of provisions relating to: the Limitation of Benefits; Exchange of Information; and Capital Gains.

Leads to the effective removal from the Russian Blacklist of non-cooperative jurisdictions.

Limitation of Benefits

Intended to prevent treaty abuse.

Treaty benefits to be renounced if: BOTH authorities conclude that the main purpose of the

presence of a resident in a contracting state is to take advantage of the treaty benefits

Only applies to companies which are not registered either in Russia or in Cyprus. (Treaty text & Official interpretation of the Cypriot Ministry of Finance). Companies registered in either one of the contracting states

are excluded from the application of the LoB provisions

Exchange of Information

The Exchange of Information is not merely limited to taxes covered by the Double Tax Treaty; it is also extended to indirect taxes.

Banking secrecy is not anymore a valid argument for refusal to

exchange information. Exchange of information between the two contracting states can be

achieved. The legislation of Cyprus was amended to that extent as to enable such information exchange.

Assistance in the collection of “revenue claims” by both tax authorities. The fact that the required information is not necessary or valuable

for the purposes of collecting taxes for a competent authority (e.g. due to tax exemption to corresponding income in the given country) can not serve as grounds for refusal to exchange the information with a competent authority of the other state.

Capital Gains

Alienation of shares deriving more than 50% of their value from property situated in a contracting state may be taxed by the state where the immovable property is situated;

Exclusion from Capital Gains provisions: Alienation of shares listed in a recognised stock exchange;

or Alienation of shares in the context of a reorganisation.

Grace period of 4 years following the entry into force of the Protocol

Effect of the New Protocol

Removal of Cyprus from the Russian blacklist upon its entry into force, thus: Eligibility to qualify for the dividend

participation exemption in case of distribution of dividends by Cypriot subsidiaries to Russian parents.

Structure 1

Double layer of Cypriot companies. Application of the favorable

domestic legislation of Cyprus as opposed to the provisions of the double tax treaty between Russia and Cyprus.

Cyprus Law Capital gains are tax exempt

provided that they relate to immovable property located outside Cyprus;

Gains on the sale of securities are exempt from Corporate Income Tax.

Fig. 1 Cyprus Holding Co

Cyprus Subsidiary Co

Russian Co

Dividends

Dividends

Capital gains

Analysis of Structure 1

Cyp Holding Company:

Dividends received from Cyp Subsidiary Co: Exemption from CIT; Exemption from Defence

Tax.

Gains on the sale of shares of the Cyp Subsidiary Co: No Capital Gains Tax; No Corporate Income

Tax.

Cyp Subsidiary Company:

Dividends received from Ru Subsidiary Co: Exemption from CIT; Exemption from Defence

Tax.

Dividends paid to CypHoldCo: No WHT (defence tax)

Ru Subsidiary Company:

Dividends paid to the Cyp Subsidiary Co: 5% WHT at source (DTT)

Cyprus International Trust

Often used in international tax structures as a wealth management tool;

Advantages of CITs: All income derived would be tax exempt in Cyprus

given that trust property is located outside Cyprus;

The advantageous provisions under the extensive network of double tax treaties may have application in certain cases.

The use of a CIT From a Russian perspective:

No inheritance tax or gift tax on the transfer of the property of the settlor to the trust;

No income tax or capital gains tax on a deemed disposal basis at the level of the settlor;

No VAT on the transfer of the assets by the settlor (private individual & not a VAT payer);

Tax imposed at the level of the beneficiaries on a remittance basis (depending on the type of income).

Alternative trust jurisdictions to Cyprus may be used

Fig. 1

Cyprus Holding Co

Cyprus Subsidiary Co

Russian Co

Trust

Structure 2 Cyprus Royalties

Company Ownership of royalties

and licensing rights for intellectual property

Cyprus Law Net royalty profits are

subject to 10% CIT; Gains on the sale of

intellectual property may be exempt from CIT;

Royalty payments are exempt from WHTs (rights must be exercised outside Cyprus)

Fig. 1Non-resident UBO

Cyprus Royalty Company

Licensee Company

Royalties

Royalties

Structure 3

Cyprus Financing Company Financing of group companies by

way of debt or working capital; Efficient accumulation of interest

income.

Cyprus Law Interest income received from

intra-group lending 10% CIT; No thin cap rules / no debt-to-

equity restrictions; No specific TP legislation, the

arm’s length principle applies; Interest paid to creditors is not

subject to WHTs.

Minimum interest margin / spread of 0.125 – 0.35% accepted.

Fig. 1Non-resident UBO

Cyprus Financing Co

Russian Co

Interest

Interest

Int’l Org. black + grey lists

Cyprus:

NOT in any BLACK lists

NOT in any GREY lists

Organisation white list grey list black list G20 √ OECD √ FATF √

Old/New Cyprus Regime

BEFORE AFTERNo Exchange of Info Increased transparency

In black/grey lists Only in white lists

No substance needed Substance important

LOW cost to operate Still LOW

HIGH Quality of services Still HIGH

Friendly to Russians Even friendlier !!

Q & A

Thank you!Thank you!

www.eurofast.net

www.taxand.com