MOSCOW, January 1. /TASS/. The rate of tax on dividends brought abroad to offshore jurisdictions (to Cyprus and Luxemburg) has gone up from 2% to 15% starting January 1, 2021. The increased tax rate will be applicable to revenues received in 2021.

Russia’s State Duma (lower house of parliament) ratified protocols on amendments to double taxation agreements with Cyprus and Luxemburg in December 2020. The documents were submitted for ratification by the Russian government.

The protocol between Russia and Cyprus on amendments to the intergovernmental agreement on evasion of double taxation dated December 5, 1998, was signed on September 8, 2020. Changes are aimed at tackling tax avoidance through use of schemes, with the help of which the biggest part of revenues of the Russian origin is virtually paid to Russian beneficiaries via the Cypriot jurisdiction, in which companies are located that do not independently administer those revenues and through which such revenues go as transit, according to an explanatory note to the document.

Exceptions from new rules

However, the provisions of the protocol set the taxation treatment of the source of income as dividends and interests at the rate of 15% with exceptions. Such exceptions regarding dividends include investments made by the government, the Central Bank, pension funds, insurance companies of both countries, as well as public companies of Cyprus and the Russian Federation, which have at least 15% of voting free-floating shares, and which directly own at least a 15% stockholding in companies paying dividends, within 365 days preceding the dividend payment date. Regarding those income, the source’s tax rate is set at 5%. The lowered rate is applied in the sole event of the actual dividend right of income receivers and the Cypriot or Russian resident status.

Regarding interest income, such exceptions include debt obligations to public companies, on which similar conditions are fulfilled regarding the amount of participation in capital of the company paying dividends, and the share of own stocks in free float. For them a 5% rate of the tax for the source is envisioned provided that such a public company is a beneficial owner of income and a resident of Cyprus or the Russian Federation.

Concurrently the protocol defines exemption from taxation for the source of interest income paid on bank loans, on traded government and corporate bonded loans, on traded Eurobond loans, as well as on debt liabilities to the government, the Central Bank, pension funds and insurance companies of both states. The actual income right of the person receiving such interest income and the resident status in the contracting state is the condition for exemption from taxation for the source of interest income on respective debt obligations.

Similar exceptions are defined by the protocol on amendments to the agreement between the Russian Federation and the Grand Duchy of Luxembourg on avoidance of double taxation and prevention of fiscal evasion regarding income and property taxes dated June 28, 1993, which was signed on November 6, 2020.

According to calculations provided earlier by Russia’s Finance Ministry, thanks to the protocol the country’s budget will additionally receive up to 150 bln rubles ($1.9 bln) per year starting 2021 from Cyprus’ raising the dividend tax. Russian President Vladimir Putin suggested on March 25 that the tax rate for dividends brought abroad to offshore jurisdictions be increased from 2% to 15%. The policy required revision of double taxation evasion agreements with certain countries.