Russia Tightening Tax Evasion Loopholes

  • There has been a trend by Russian nationals to launder funds through Cyprus.
  • The Russian Ministry of Finance predicts that the amended protocol will allow the Russian budget to receive additional 150 billion roubles.
  • Tax evasion is very common in Russia.

Russia ratified a series of amendments to the protocol pertaining to the double taxation agreement between Cyprus and Russia. The original agreement was signed on the December 5, 1998. The new amendments are geared towards the efficiency of dealing with tax evasion.

An official explanation of the agreement states:

“The need for changes in the agreement due to changed terms of economic activities and motivated by the economic situation in the Russian Federation and the world at large, which in turn caused the need to concentrate financial resources to ensure the efforts of the government of the Russian Federation measures to support the population and economy of the country in light of the threat of the spread of the new coronavirus infection.”

Cyprus, officially called the Republic of Cyprus, is an island country in the Eastern Mediterranean. The third largest and third most populous island in the Mediterranean, it is located south of Turkey; west of Syria and Lebanon; north of Egypt, Israel, and the Palestinian region of the Gaza Strip; and southeast of Greece.

There has been a trend by Russian nationals to launder funds through Cyprus. It should be noted that the provisions of the protocol establish a tax regime at the source of income, in the form of dividends and interest, at a rate of 15% with exceptions.

Such exceptions to dividends include investments made by the Kremlin, the Russian Central Bank, pension funds, insurance companies in both countries, as well as public companies of Cyprus and the Russian Federation which have a share of voting rights in free circulation of at least 15%, and which directly own at least 15% of the capital of companies paying dividends, during 365 days immediately preceding the date of payment of dividends.

Such income is subject to a withholding tax rate of 5%. This reduced rate applies only if the recipients of income and the status of a resident of Cyprus or the Russian Federation have an actual right to dividends.

Moreover, there is an exception regarding the debt obligations to Russian public corporations. This scenario will be the subject of the 5% withholding tax rate.

Vladimir Vladimirovich Putin is a Russian politician and a former officer of the KGB who has served as President of Russia since 2012, previously holding the position from 1999 until 2008.

At the same time, the protocol introduces an exemption from taxation at source, including the interest paid on bank loans, accessing government and corporate bonds, traded in the Eurobond loans, and debt obligations to the government, Central Bank, pension funds, and insurance companies in both States.

Eurobonds allow corporations to raise funds by issuing bonds in a foreign currency. The condition for the application of the tax exemption at the source of interest income on the relevant debt obligations is that the person receiving such interest income has an actual right to income and is a resident of a contracting state.

The Russian Ministry of Finance predicts that the amended protocol will allow the Russian budget to receive additional 150 billion roubles (approximately $2 billion).

Tax evasion is very common in Russia. There are elaborate schemes constantly created in order to avoid paying taxes in Russia. Offshore accounts are very popular in Russia.

The proposed constitutional amendments by President Vladimir Putin are starting to trickle into the laws. There are additional announcements pertaining to tax evasion expected, and there are more protocols in the works with other nations.

Russia is corrupt, and until the mentality of the people changes, tax evasion will continue to be rampant.

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Christina Kitova

I spent most of my professional life in finance, insurance risk management litigation.

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