Double Taxation Agreement with Cyprus: Definition, Application and Essence

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Russia as an active participant in world relations is connected with many states of the globe by international treaties. One of such important documents is the agreement with Cyprus on the avoidance of double taxation. In the article we will analyze the essence of this document, its most important provisions. Let's look at several options for generating income and the principles that apply to them to eliminate double taxation.

What is this?

The agreement with Cyprus on the avoidance of double taxation was adopted in Nicosia on December 5, 1998. The document was signed by the Government of Cyprus and the Government of the Russian Federation in relation to taxes on capital and income. The purpose of the document is to encourage economic cooperation between these states.

The double taxation treaty with Cyprus applies to persons who are considered to be residents of one or both member states. The paper discussesnext:

• Taxes covered by the treaty.
• Who is a resident.
• Taxation on income from the use of real estate.
• Taxation of profits from various business activities.
• Taxation of income from international transportation.
• Question with associates.
• Question about dividends, roy alties, interest.
• Taxation of income from the alienation of property.
• Taxation of profits from the provision of personal services.
• Taxation of employment, directors' fees, income of artists, athletes, government officials, retirees, interns, students, academics.
• Taxation of other income.
• Avoiding double taxation, non-discrimination, tax assistance, limited benefits.
• Entry into force and termination of the agreement.

Next, consider the most important provisions of the double taxation agreement with Cyprus.

What taxes are implied?

This treaty applies to income and capital taxes levied on behalf of each contracting party, their subsidiaries and local government structure.

Within the framework of the double taxation agreement between Russia and Cyprus, income taxes, capital are considered all tax payments levied on the total amount of profit, the total amount of capital or individual componentsincome/capital. This number includes taxes on income from the alienation of property (real and movable), taxes levied on wages, taxes on income from capital growth.

For the Russian Federation, these are the following payments:

• Income tax for organizations and businesses.
• Income tax for an individual.
• Property tax for organizations and enterprises.
• Citizens' property tax.

For Cyprus, the following stands out:

• Income taxes.
• Corporate income taxes.
• Special charges for the defense of the Republic.
• Taxes on capital gains.
• Real estate tax.

Now let's turn to the consideration of certain provisions of the double taxation agreement (in Russia and Cyprus).

Real estate income

In this section, the following should be highlighted:

• Income derived by a resident of one of the contracting countries from immovable property located in the other contracting country may be taxed in that other country. This also applies to profits from agriculture, forestry.
• Real estate here is what is considered to be it according to the legislation of the contracting states. Vehicles, ships or aircraft are not included in the real estate category.
• Real estate also includes property that is ancillary to real estate. ATagriculture and forestry is livestock and equipment, various fish lands.

Business profit

The following provision of the double tax treaty applies to business activities:

• The profit of an enterprise of one of the contracting parties-states is subject to taxation only in that state. But provided that the organization does not carry out business activities in another contracting country through its permanent establishment. If this condition is not met, then the profit is subject to taxation in both states. But in the second, different one, only to the extent that applies to this representation.
• As regards determining the amount of taxable income in the second state, the income of a permanent branch is the amount of profit that it could receive as a separate, separate enterprise engaged in the same / similar area. And on the condition of working in complete independence from the parent company.
• When determining the profit of a representative office, deductions are allowed for management and general administrative expenses for its maintenance.
• Profit cannot be called attributable to a permanent affiliate solely on the basis of its purchase of raw materials or products for this enterprise.

Traffic revenue

Within the framework of the double taxation agreement between the Russian Federation and Cyprus, international transportation means the operation of air, seaships and other road transport. Taxes are levied on the income of owners, tenants and charterers. Moreover, not only from the operation of the aforementioned transport, but also from leasing it.

Taxed and leased containers and related equipment, without which the operation of road vehicles, aircraft and ships is impossible.

Taxation here is carried out only in the contracting state where the place of business management of persons who profit from international transportation is located.

Dividends

We continue to analyze the international agreement on the avoidance of double taxation between the Russian Federation and Cyprus. Regarding dividends, the following is indicated here:

• Dividends transferred by a company resident of one of the contracting parties-countries to a company resident of the other party-country may be taxed in another state.
• It is important to consider that the same dividends may be taxed in the country of residence of the paying company.
• But if, under these conditions, the person having the actual right to receive dividends is a citizen of a second state, then the taxes levied should not exceed 5% of the total income, provided that this person has directly invested his funds in the capital of the company- payer. This amount is at least 100,000 euros. In all other cases, the amount of the tax fee should not exceed 10% of the amount of dividends.

Interest

Tax avoidance agreements are signed by the countries of the world quite often. We are considering an agreement concluded between Russia and Cyprus. Regarding percentages, it says the following:

• Interest that arises in one of the states - parties to the agreement and is paid to a resident of the other, is taxed only in the second, other state.
• Interest here means profit on debt claims of any kind, regardless of mortgage security and the right to participate in the income of the credited debtor.

Roy alties

As mentioned above, in 1998 an agreement was signed to avoid double taxation. The countries that have concluded it are Cyprus and the Russian Federation. Consider what it says about roy alties:

• Roy alties that arise in one of the states that have entered into the contract and are paid to a resident of another state will be subject to taxation only in the second country.
• Roy alties in this context are payments of any kind received as a consideration for the exercise or grant of the right to use copyright in works of art and literature, scientific discoveries, as well as motion pictures, video recordings for television broadcasting, audio recordings for broadcasting, patents, know-how, computer programs, developed formulas, trademarks, designs, models, descriptions of secret processes and any information that is applicable in commercial, scientific, industrial activities. Also, roy alties will be considered a fee for use (orright to use) commercial, industrial or scientific equipment.
• These provisions do not apply if the person with the actual right to roy alties is a resident of one participating country, but carries out business activities in another, has its permanent representative office there, provides citizens and organizations with personal services on an ongoing basis.

Foreign profits

Let's consider how the application of the double taxation avoidance agreement works in this case:

• Income derived by a resident of one of the Contracting Party States from the alienation of immovable property located in another contracting country may be taxed in that other country.
• If it is movable property that is part of a permanent branch of an enterprise or part of a permanent base of a resident of one of the states - parties to the agreement in another contracting country, then such profits will be taxed in another state.
• Income received by a resident of one of the contracting countries from the alienation of road equipment, vehicles, aircraft / ships that are operated in international transportation (or are directly related to such operation) will be subject to taxation only in the country of which the resident this person is speaking.

Income from employment

The essence of the double taxation avoidance agreement is that when itin effect, residents are exempt from paying tax on income that was already subject to taxation in another state party to the treaty.

Wages and similar remuneration for work are subject to taxation only in the state of which the worker is a resident. If the employment takes place in a second state, then the remuneration received is taxed according to the legislation of that other state.

Now mention the exceptions to this current double tax treaty. The remuneration for labor, which is received by a resident of one party (Russia or Cyprus) for hired work carried out in another state (Russian Federation or Cyprus), is subject to taxation only in the first country in the following cases (if they are combined):

• The payee is in another state (Cyprus or Russia) for a total period of no more than 183 days a year.
• Remuneration provided by (or on behalf of) an employer who is not a resident of another contracting country.
• The cost of paying this salary is not borne by a permanent establishment located in the second state party to the agreement.

Income of other workers

Now consider the income provisions of other professional workers in the Cyprus double tax treaty with Russia:

• Executive fees received by a resident of one of the contracting parties inas a member of the board of directors of a firm, an organization that is a resident of the other party (Russia or Cyprus), may be subject to taxation in another state.
• The following provision applies to athletes, artists - theatre, cinema, radio, television, music. All income received by such a resident of one state from his personal work, which is carried out in another state, may be taxed in the second (both in the Russian Federation and in Cyprus).
• Remuneration paid by the government of one of the contracting countries (or its subdivision, local authorities) to individuals performing service for the benefit of that state will be taxable only in that country.
• Pensions paid by the government of one of the countries in connection with past employment are taxed only in that country.

Capital

To conclude, consider the capital provision under the intergovernmental double taxation agreement in Russia and Cyprus:

• Capital is represented by real estate. If it belongs to a resident of one contracting party, but is located in another, it may be taxed in the second state, which is either Russia or Cyprus.
• Capital - movable property and part of the asset of a permanent branch office in Cyprus/Russia. A resident of one contracting party has similar capital in another contracting country. It may also be subject to tax levies in another party to the agreement.
• Capital is represented by air, sea and road transport involved in international transportation. It will be subject to tax payments only in the state of which its owner is a resident.
• All other elements of capital will be taxable only in the contracting country of which the owner is a resident.

Elimination for RF

The following scheme applies here: if a Russian resident receives income or owns capital, which, under the terms of this agreement, is subject to Cypriot taxes, the amount of tax on such income/capital (already paid in Cyprus) is deducted from the tax levied in the Russian Federation.

At the same time, the amount of the deduction does not exceed the taxes on such capital/income in Russia.

Cyprus Elimination

Cypriot taxes paid in respect of any income received in the Russian Federation or capital located in the Russian Federation will be deducted from the Russian tax fee paid in accordance with the legislation of the Russian Federation and the provisions of this international agreement. However, this deduction does not exceed the established Cypriot tax amounts.

If income refers to dividends sent by a Russian resident company to a Cyprus resident company, Russian tax is deductible (in addition to any Russian tax on dividends), which is payable in relation to the profits of the company paying dividends. The deduction in this case should also not exceed the amount of the Cypriottax established in this area.

Thus, the double taxation avoidance agreement concluded between the Russian Federation and Cyprus in 1998 (in 2012, the document was amended) allows you to avoid the repeated payment of taxes in business activities, capital transactions, and receipt of wages fees and so on. It applies to persons who are residents of one of the states that signed the document, but who carry out their activities in the territory of another - the Russian Federation or Cyprus. As can be seen from the agreement, each of the cases has its own taxation conditions.