Russia as an active participant in world relations is connected with many states of the globe by international treaties. One of these 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. Consider several options for generating income and the principles that apply to eliminating double taxation.
What is it?
An 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 with regard to taxes on capital and income. The purpose of the document is to promote economic cooperation between these states.
The Double Taxation Agreement with Cyprus applies to individuals who are considered residents of either one or both of the participating States. The document examined the following:
- Taxes covered by the contract.
- Who is a resident.
- Taxation on profits from the use of real estate.
- Taxation of profits from various entrepreneurial activities.
- Taxation of income from international transport.
- Question with associates.
- Question with dividends, royalties, interest.
- Taxation of income from disposal 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, researchers.
- Taxation of other income.
- Elimination of double taxation, non-discrimination, assistance in collecting taxes, restrictions on benefits.
- The entry into force of the agreement and its termination.
Next, we consider the most important provisions of the agreement with Cyprus on the avoidance of double taxation.
What taxes are implied?
This agreement applies to income taxes and capital levied on behalf of each of the contracting parties, their units and the local government.
In the framework of the agreement on the avoidance of double taxation of Russia and Cyprus, income taxes and capital are all tax payments levied on total profits, total capital or certain components of income / capital. This number includes taxes on income from the alienation of property (immovable and movable), taxes levied on salary, taxes on income from capital growth.
In relation to the Russian Federation, these are the following payments:
- Tax on income of organizations and enterprises.
- Income tax for an individual.
- Property tax for organizations and enterprises.
- Property tax for citizens.
For Cyprus, the following are highlighted:
- Income taxes.
- Corporate income taxes.
- Special fees for the defense of the Republic.
- Capital gains taxes.
- Real estate tax.
We now turn to the consideration of certain provisions of the agreement on the avoidance of double taxation (in Russia and Cyprus).
Real estate income
In this section, the following should be highlighted:
- Income received by a resident of one of the contracting countries from immovable objects located in the other contracting country may be taxed in that other country. This also applies to profits from agriculture, forestry.
- Real estate here refers to what is considered to be in accordance with the laws of the contracting states. Motor transport, ships or aircraft are not included in the category of real estate.
- Real estate also includes property that is auxiliary to real estate. In agriculture and forestry, this is livestock and equipment, various fishing grounds.
Profit from Entrepreneurship
The following clause of the double taxation avoidance agreement relates to business activities:
- The profits of an enterprise of one of the contracting parties-states are 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 profit is taxable in both states. But in the second, different, only to the extent that applies to this representation.
- Regarding the determination of the amount of taxable profit in the second state, the income of a permanent branch is the amount of profit that he would be able to get, being a separate, separate enterprise engaged in the same / similar field. And subject to the work in complete independence from the parent company.
- When determining the profit of a representative office, deductions for managerial and general administrative expenses for its maintenance are allowed.
- Profit can not be called related to a permanent branch only on the basis of the purchase of raw materials or products for this enterprise.
Income from transportation
Within the framework of the agreement on the avoidance of double taxation of the Russian Federation and Cyprus, international transport refers to the operation of aircraft, ships and other road vehicles. Taxes are levied on the income of owners, tenants and charterers. Moreover, not only from the operation of the aforementioned transport, but also from renting it out.
The leasing of containers and related equipment, without which the operation of road vehicles, aircraft and ships is impossible, is taxed.
Taxation here is carried out only in the contracting state where the place of business management is located for persons who profit from international traffic.
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 resident company of one of the contracting country parties to a company resident of the other country party may be taxed in another state.
- It is important to consider that the same dividends may be taxed in the country whose resident company is the payer.
- But if, under these conditions, the person with the actual right to receive dividends is a citizen of the second state, then the taxes levied should not exceed 5% of the total income, provided that this person directly invested in the capital of the payer company. This amount is at least 100,000 euros. In all other cases, the amount of tax levy should not exceed 10% of the amount of dividends.
Interest
Agreements to avoid taxation by countries of the world are signed quite often. We are considering a treaty concluded between Russia and Cyprus. Regarding interest, it says the following:
- Interest arising in one of the states party to the contract and paid to a resident of another is taxed only in the second, other state.
- Here, interest is understood as profit on debt claims of any kind, regardless of mortgage collateral and the right to participate in the income of the loaned, debtor.
Royalty
As mentioned above, in 1998 an agreement was signed to avoid double taxation. The countries that concluded it are Cyprus and the Russian Federation. Consider what it says about royalty:
- The royalties that arise in one of the states that concluded the contract and are paid to a resident of another state will be taxable only in the second country.
- Royalty in this context - payments of any kind received in the role of compensation for the use or granting of the right to use copyright in objects of art and literature, scientific discoveries, as well as films, video recordings for television broadcasting, audio recordings for broadcasting, patents, know-how, computer programs, developed formulas, trademarks, design, models, description of secret processes and any information that is applicable in commercial, scientific, industrial activity. Royalty will also be considered a fee for using (or the right to use) commercial, industrial or scientific equipment.
- These provisions do not apply if the person who has the actual right to royalties is a resident of one participating country, but carries out business activities in another, has his own permanent representative office there, and provides personal services to citizens and organizations on an ongoing basis.
Profit from alienation of property
Consider how the double taxation avoidance agreement is applied in this case:
- Income received by a resident of one of the contracting state parties from the alienation of real estate located in the other 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 party to the contract in another contracting country, then such profit 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 traffic (or are directly related to such operation) will be taxable only in the country of which the person is a resident.
Income from employment
The essence of the double taxation avoidance agreement is that when it is valid, residents are exempted from paying tax on income that was already subject to taxation in another state party to the agreement.
Wages and similar remuneration for labor are subject to taxation only in the state of which the worker is a resident. If the employment is in the second state, then the remuneration received is taxed in accordance with the laws of that other state.
Now we mention the exceptions to this current double taxation avoidance agreement. Remuneration for work received by a resident of one party (Russia or Cyprus) for wage work carried out in another state (Russia or Cyprus) is taxable only in the first country in the following cases (when combined):
- The payee is located in another state (Cyprus or the Russian Federation) for a total period of not more than 183 days a year.
- The remuneration is provided by an employer (or on his behalf) who is not a resident of the other contracting country.
- The costs of the payment of this salary are not borne by the permanent establishment located in the second state party to the contract.
Income of other workers
Now consider the provisions regarding the income of other professional workers in the Cyprus Double Taxation Agreement with Russia:
- The fees of managers received by a resident of one of the contracting parties as a member of the board of directors of a company, organization that is a resident of the other party (Russia or Cyprus), may be taxed in another state.
- The following provision applies to athletes, art workers - theater, 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).
- The remuneration paid by the government of one of the contracting countries (or its unit, local authorities) to individuals performing services for the benefit of this state will be taxable only in that country.
- Pensions paid by the government of one of the states in connection with past employment are taxed only in that country.
Capital
In conclusion, we consider the provision on capital in the framework of the intergovernmental agreement on the avoidance of double taxation 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 / in Russia. A resident of one party to the contract has similar capital in another country - a party to the contract. It may also be taxed in another country party to the agreement.
- The capital is represented by air, sea and road transport involved in international traffic. 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 its owner will be a resident.
Elimination in relation to the Russian Federation
Here the following scheme applies: if a Russian resident receives income or owns capital which is subject to Cyprus taxes under the terms of this agreement, the amount of tax on such profit / capital (already paid in Cyprus) is deducted from the tax levied in the Russian Federation.
Moreover, the deduction amount does not exceed taxes on such capital / income in Russia.
Elimination for Cyprus
From Cyprus taxes paid in respect of any income received in the Russian Federation, or capital located in the Russian Federation, the Russian tax fee paid in accordance with the laws of the Russian Federation and the provisions of this international agreement will be deducted. But such a deduction does not exceed the established amount of Cyprus tax.
If income means dividends sent by a resident company of the Russian Federation to a Cyprus resident company, the Russian tax is payable (in addition to any Russian dividend tax), which is payable in relation to the profit of the company paying the dividends. The deduction in this case also should not exceed the amount of Cyprus tax established in this area.
Thus, the agreement on the avoidance of double taxation, concluded between the Russian Federation and Cyprus in 1998 (in 2012, the document was amended), avoids the repeated payment of taxes for business activities, capital transactions, salaries, etc. It applies to persons who are residents of one of the signatories of the state, but carry out their activities in the territory of the other - the Russian Federation or Cyprus. As can be seen from the agreement, each of the cases has its own taxation conditions.