Chinese investors use Russia as a platform to invest in other countries because of favorable tax policies, including a zero rate profits tax enjoyed by Russian companies on dividends they receive from subsidiaries based in countries that Russia has signed tax agreements with. Russian companies' dividends from subsidiaries that are based in countries that Russia does not have tax agreements with are taxed at the Russian corporate tax rate of 20 percent.
The zero percent tax rate on dividends received by a Russian parent company from subsidiaries in Cyprus is dependent on the Russian company owning no less than 50 percent of the subsidiary capital on an ownership or depository receipts basis over the past 365 days. Russian companies that own less than a 50 percent stake in Cypriot subsidiaries they receive dividends from will be subject to a 9 percent tax on the dividends.
Cyprus' removal from the Russian blacklist was the last barrier in the implementation of a double taxation avoidance agreement signed between Russia and Cyprus in 2010.
The Russian blacklist from which Cyprus will be removed next year includes countries and territories that Russia considers to offer preferential tax treatment or that Russia considers to not provide enough disclosure on financial transactions. Up till 2010, Russian financial authorities had long leaned on Cyprus to provide a greater level of tax information exchange. Russian companies that conduct trade with countries included on the blacklist face burdensome taxes and strict reporting obligations.
Russia's tax agreement with Cyprus agreement will come into effect on January 1, 2013 -- the same time the removal of Cyprus from the blacklist becomes official. The agreement not only gives tax exemptions for repatriated dividends from Russian subsidiaries in Cyprus, but also ensures that transactions between companies of the two countries shall not be subject to the onerous transfer pricing rules that apply to Russian companies when transacting with blacklisted countries.
As a result of the new measures, Cyprus will likely become an even more attractive investment option for Russia-based Chinese investors.
