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5% Reduced Dividend Tax Rate for Cyprus Stockholders of Russian Companies Explained by MinFin


Protocol from October 7, 2010 to the Double Taxation Treaty between Russia and Cyprus came into effect on April 2, 2012. In connection, the Ministry of Finance in its Letter #03-08-05 from July 16, 2012 explains the procedures for applying for the reduced 5% tax rate for dividends distributed from a Russian company to its Cyprus shareholders.

A 5% tax rate on the total amount of dividends paid is applied in cases when the beneficiary of the dividends has directly invested into company’s capital $100,000 or more. A 10% rate is used for all other cases.

The term “direct investment into company’s capital” refers to purchase of stocks of primary or following emissions, as well as purchase of stocks on the stock market or direct purchases from a previous owner. The “$100,000” criterion is applied directly to each individual company without taking into consideration the connection between parent and subsidiary companies. Thus, the term “direct investment” specifies a mode of investment and implies implementation of investment by the actual beneficiary.

This explanation also references the new Article 29 “Tax Benefit Entailment.” In accordance with this Article, a tax resident of one country is not eligible for tax reductions or exemptions prescribed by the treaty for profits received from another country if, after mutual consultation, the tax authorities of both countries determine that this entity was created or exists with a primary goal of receiving the mentioned tax benefits which would not be available to it otherwise. 

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