What Russian entrepreneurs in Cyprus can expect amid tightening offshore policy

Russian businessmen may face some difficulties when running their business in Cyprus due to the COVID-19 pandemic and resolutions of the Russian authorities, including the restrictions on travel. The problem is that management and meetings of directors must be held at the place of the company’s residence in order to preserve the residency of low-tax jurisdictions – for example, in Cyprus or another EU country, which must be confirmed by the physical presence of key persons and accompanying documents.

The situation is also complicated by the EU authorities, which have decided to close the borders for citizens of the third-party countries amid the pandemic: this creates difficulties in managing a tax resident and reduces the mobility of business in maintaining an optimal level of presence abroad. As a result, the prospect of using foreign companies is doubtful, because they can be recognized as companies controlled by Russian tax residents, and the profit received by the owner of the organization will be subject to personal income tax in Russia, which is 13%. According to the law, a foreign company will be recognized as a Russian tax resident, if an appropriate inspection proves that it is managed from the territory of the Russian Federation. As a result, all profits will be taxed in Russia. The Federal Tax Service is taking active measures to identify such foreign companies, and there have already been some cases.

In addition, the President of the Russian Federation initiated the introduction of a 15% tax on dividends and a 20% tax on interest and royalties. Royalties are exempt from additional tax in Cyprus, but it is charged in transit jurisdictions. This initiative will have a negative effect on the operation of foreign structures and can bring tax efficiency to naught. Significant damage was caused to entrepreneurs registered in the jurisdictions of Cyprus, Luxembourg and Malta. One may assume that Russia will revise the terms of the double taxation treaty with the Netherlands, Luxemburg, Singapore and Switzerland a well. These discussions are already being actively pursued at the level of the Foreign Ministries of the above countries and require a proactive response.

Cyprus and Russia signed a protocol amending the double taxation treaty on September 8, 2020, following the completion of negotiations in August.

According to the agreement reached, the existing withholding tax (WHT) on dividends and interest payments made from Russia to Cyprus will be increased to 15%, with some exceptions.

Exceptions from 15% WHT (withholding tax)

Both countries have agreed to apply a 5% income tax, if the dividends are received or beneficially owned by:

• a regulated entity, such as a pension fund or an insurance company;
• an entity whose stocks are listed on the stock exchange (subject to certain conditions);
• the Government, political unit or local authorities; or
• the Central bank.

The two countries have also agreed that there is no tax on interest payments, if they are beneficially owned by:

• an insurance company or a pension fund;
• the Government, political unit or local authorities;
• the Central bank; or
• a banking institution.

In addition, the WHT is not charged on interest earned on the following listed bonds:

• corporate bonds;
• Government bonds; or
• Eurobonds.

Finally, the WHT must not exceed 5%, if the beneficial owner of the stake is a company whose stocks are listed on the stock exchange (under certain conditions).

Zero WHT on royalty payments

Zero tax on royalty payments from Russia to Cyprus will not change.

Local income tax rates for non-residents remain at 0%

Cyprus will continue not to withhold tax on dividends and interest from non-residents of Cyprus, in accordance with local laws.

In turn, the European Union also introduced rules for controlled foreign companies, “exit tax” and restrictions on the deduction of interest expenses within the adopted directives. In addition, the EU countries must provide comprehensive information on cross-border transactions with detailed tax planning. Classic offshores that are in demand among Russian entrepreneurs, such as the BVI, Caymans, Seychelles and Belize, have faced mandatory requirements to create a local level of economic presence (Substance) in their territory.

The owners of foreign companies regularly face the tightening of anti-corruption legislation expressed by the OECD and FATF requirements, which can negatively influence the efficiency of their structures operation, expressed in the complication and slowdown of processes. This process has been especially active over the past seven years. The rules for controlled foreign companies appeared on the territory of Russia, and the concept of the actual recipient of income was developed over that time. Most countries initiate taking action to prevent tax base erosion and profit transfer (BEPS).

Taking into account the severity of the consequences for business, the following question becomes urgent for entrepreneurs: "What measures can be taken amid toughening offshore policy and restrictions?"

The following options are available to legal entities:

• adjusting the corporate structure to preserve privileges;
• changing partner banks;
• transferring tax residency;
• transferring the company to a special administrative region;
• obtaining tax preferences for non-residents and taking advantage of the double taxation laws;
• creating an economic presence abroad; and
• re-domiciliation: moving a business to another jurisdiction with the possibility of creating an economic presence without returning assets to the Russian Federation.

The implementation of the above measures requires a professional approach. As such, it is recommended to ask for a support of experts.

In addition, Cyprus applied for accession to the Schengen member states in September 2019. The fulfillment by Cyprus of the requirements for personal data protection was the condition for the accession of Cyprus to Schengen, which it successfully implemented in July 2020. We expect the accession of Cyprus to Schengen in the near future, which will allow the following to not only holders of passports, but also to residents of Cyprus:

• to travel to the Schengen member states without passing through passport and visa control; and
• residents of the Republic of Cyprus will be able to travel to the EU countries in a visa-free regime, whereas today they additionally need a Schengen visa to enter the EU.

Despite all the changes, Cyprus still offers uncontested preferential terms for businessmen. Bundled with the non-domicile status, it provides truly unprecedented preferential tax preferences and conditions for running business from Cyprus in any remote market.

At Credox Consulting, we are always happy to offer our clients the services to maintain a flexible and stable business model, resistant to future changes. Even amid the COVID-19 pandemic, we provide assistance in obtaining special permits for visiting Cyprus and other EU countries for the citizens of the EU and third-party states. We register companies in short terms, open bank accounts and provide access to multiple financial instruments, obtain all the necessary licenses, resolve immigration issues for top management and employees of these companies and ensure an economic presence in accordance with the requirements of local laws. Please call us for detailed advice.