10/04/2008

Cyprus has been blacklisted by both Russia and Ukraine tax Authorises. This could pose problems for Cyprus which has managed to attract many international companies to the small island.

Russia and Cyprus have long been financial partners with the island attracting many companies from Russia. Such investment has boosted Cyprus financial services industry including its banking sector with the island aiming to achieve a financial centre for foreign investment. Low taxation rates are a strong advantage for foreigners wishing to invest on the island. All these factors are contributing to placing Cyprus as an international business centre.

However Cyprus has fallen foul of being Black listed by Russia stemming form the fact that Russian companies can register in Cyprus and then repatriating their dividends tax-free back home. This has not made Russian Tax Authorities too happy.

Being black listed may not however have the overall effect that Russian Tax Authorities wanted to achieve. Foreign companies investing in Russia through Cyprus subsidiaries are exempt from the rule, leaving many loopholes to be utilized. In fact the Russian Tax Code came into effect on January 1 introducing a tax exemption on dividends earned by Russian companies through foreign subsidiaries under certain conditions. This exemption does not apply to foreign organizations registered in territories seen as having beneficial tax treatment or that are not required to disclose and provide information on financial operations.

A positive aspect for Cyprus authorities is that most Cyprus- registered companies are not subsidiaries, in fact most are holding companies receiving dividend from Russia and not vice versa. However the problem of Black listing could be avoided by using an intermediary company which is not Black listed by the Russian Authorities.

The Cyprus and Russia Double Taxation Agreement is also favourable and re-negotiating the treaty could prove harmful to attracting investment in Cyprus

Until recently, the rate was 9% for Russian companies and 15% for foreign ones. Exemption from these payments was granted at the request of President Putin, who instructed the ministry to create stimuli for large companies to register at home. However because of the proviso requiring at least a 500 million rouble stake in share capital, only major companies affiliated with the state would be able to use the privilege, but they are unlikely to use some obscure offshore territory to register.

Major future investments are most likely to be channelled through Malta, Luxembourg, the Netherlands, Austria and Britain, which have not been black listed. Cyprus will still remain attractive for Russian businesses, because the ministry's instruction will in no way affect the present tax-optimizing schemes involving local companies and the Cyprus Russian Double Taxation agreement, until re-negotiated still proves advantageous for Russian Businesses wishing to invest in Cyprus.

ClarisGlobal's office in Valletta, Malta, reported increased interest from Cyprus and offshore professional advisers examining the option of using Malta's favourable holding  regime for clients. "In view of the absence of withholding taxes in Malta, we have received more inquiries from intermediaries in in the past weeks," said Dr Priscilla Mifsud Parker of Claris Trustees & Fiduciaries Ltd in Malta.

"There has been a marked increase in inquiries from Russian and Ukrainian tax advisors seeking to use Malta companies to route dividends back to Russia," said Dr Jean-Philippe Chetcuti, tax partner at Chetcuti Cauchi Advocates, Malta's leading tax and legal practice for company management.  For more information about Malta's holding company regime and the taxation of Malta companies, visit our jurisdictions section.