Cyprus: Practical application of the new developments and its impact on tax structuring

1. Cyprus: Practical applicationof the new developmentsand its impact on tax structuring Moscow, 25th June 2009

2. New Protocol • New Protocol to the Double Tax Treaty between Cyprus and Russia: • Initialed on 16th April 2009, in Nicosia, Cyprus; • Expected to be signed and ratified by the end of the year and enter into force by 01/01/2010. • The Protocol brings significant changes via the incorporation of provisions relating to: • the Limitation of Benefits; • Exchange of Information; and • Capital Gains. • Leads to the effective removal from the Russian Blacklist of non-cooperative jurisdictions.

3. Limitation of Benefits • Intended to prevent treaty abuse. • Treaty benefits to be renounced if: • BOTH authorities conclude that the main purpose of the presence of a resident in a contracting state is to take advantage of the treaty benefits • Only applies to companies which are not registered either in Russia or in Cyprus. (Treaty text & Official interpretation of the Cypriot Ministry of Finance). • Companies registered in either one of the contracting states are excluded from the application of the LoB provisions

4. Exchange of Information • The Exchange of Information is not merely limited to taxes covered by the Double Tax Treaty; it is also extended to indirect taxes. • Banking secrecy is not anymore a valid argument for refusal to exchange information. • Exchange of information between the two contracting states can be achieved. The legislation of Cyprus was amended to that extent as to enable such information exchange. • Assistance in the collection of “revenue claims” by both tax authorities. • The fact that the required information is not necessary or valuable for the purposes of collecting taxes for a competent authority (e.g. due to tax exemption to corresponding income in the given country) can not serve as grounds for refusal to exchange the information with a competent authority of the other state.

5. Capital Gains • Alienation of shares deriving more than 50% of their value from property situated in a contracting state may be taxed by the state where the immovable property is situated; • Exclusion from Capital Gains provisions: • Alienation of shares listed in a recognised stock exchange; or • Alienation of shares in the context of a reorganisation. • Grace period of 4 years following the entry into force of the Protocol

6. Effect of the New Protocol • Removal of Cyprus from the Russian blacklist upon its entry into force, thus: • Eligibility to qualify for the dividend participation exemption in case of distribution of dividends by Cypriot subsidiaries to Russian parents.

7. Double layer of Cypriot companies. Application of the favorable domestic legislation of Cyprus as opposed to the provisions of the double tax treaty between Russia and Cyprus. Cyprus Law Capital gains are tax exempt provided that they relate to immovable property located outside Cyprus; Gains on the sale of securities are exempt from Corporate Income Tax. Fig. 1 Structure 1 Cyprus Holding Co Capital gains Dividends Cyprus Subsidiary Co Dividends Russian Co

8. Cyp Holding Company: Dividends received from Cyp Subsidiary Co: Exemption from CIT; Exemption from Defence Tax. Gains on the sale of shares of the Cyp Subsidiary Co: No Capital Gains Tax; No Corporate Income Tax. Cyp Subsidiary Company: Dividends received from Ru Subsidiary Co: Exemption from CIT; Exemption from Defence Tax. Dividends paid to CypHoldCo: No WHT (defence tax) Ru Subsidiary Company: Dividends paid to the Cyp Subsidiary Co: 5% WHT at source (DTT) Analysis of Structure 1

9. Cyprus International Trust • Often used in international tax structures as a wealth management tool; • Advantages of CITs: • All income derived would be tax exempt in Cyprus given that trust property is located outside Cyprus; • The advantageous provisions under the extensive network of double tax treaties may have application in certain cases.

10. From a Russian perspective: No inheritance tax or gift tax on the transfer of the property of the settlor to the trust; No income tax or capital gains tax on a deemed disposal basis at the level of the settlor; No VAT on the transfer of the assets by the settlor (private individual & not a VAT payer); Tax imposed at the level of the beneficiaries on a remittance basis (depending on the type of income). Alternative trust jurisdictions to Cyprus may be used Fig. 1 The use of a CIT Trust Cyprus Holding Co Cyprus Subsidiary Co Russian Co

11. Cyprus Royalties Company Ownership of royalties and licensing rights for intellectual property Cyprus Law Net royalty profits are subject to 10% CIT; Gains on the sale of intellectual property may be exempt from CIT; Royalty payments are exempt from WHTs (rights must be exercised outside Cyprus) Fig. 1 Structure 2 Non-resident UBO Royalties Cyprus Royalty Company Royalties Licensee Company

12. Cyprus Financing Company Financing of group companies by way of debt or working capital; Efficient accumulation of interest income. Cyprus Law Interest income received from intra-group lending 10% CIT; No thin cap rules / no debt-to-equity restrictions; No specific TP legislation, the arm’s length principle applies; Interest paid to creditors is not subject to WHTs. Minimum interest margin / spread of 0.125 – 0.35% accepted. Fig. 1 Structure 3 Non-resident UBO Interest Cyprus Financing Co Interest Russian Co

13. Int’l Org. black + grey lists Cyprus: NOT in any BLACK lists NOT in any GREY lists Organisationwhite listgrey listblack list • G20 √ • OECD √ • FATF √

14. Old/New Cyprus Regime BEFOREAFTER No Exchange of Info Increased transparency In black/grey lists Only in white lists No substance needed Substance important LOW cost to operate Still LOW HIGH Quality of services Still HIGH Friendly to Russians Even friendlier !!

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