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Russia clarifies application of Cyprus tax treaty

The Russian Finance Ministry issued guidance, on 23 October 2006, clarifying the application of the Cyprus-Russia tax treaty to dividend payments made to Cyprus residents. The treaty was signed on 5 December 1998 and has been in force since 1 January 2000.

Under the treaty, dividends paid by a company that is a resident of a contracting state to a resident of the other contracting state may be taxed in that other state. Such dividends may also be taxed in the state in which the company paying the dividends is a resident and according to the laws of that state.

But, if the beneficial owner of the dividends is a resident of the other state, the tax charged shall not exceed 5% of the gross amount of the dividends if the beneficial owner has directly invested at least US$100,000 in the company. A 10% tax rate applies to the gross amount of dividends in other cases.

The Russian Finance Ministry stated in its guidance that Russia and Cyprus signed a memorandum on 10 August 2001, agreeing that "direct investment" for the purposes of the treaty means the acquisition of a company's shares on initial and supplementary share issues and in the secondary securities market.

The Ministry states that a Cyprus resident can meet the treaty's direct investment requirement by contributing to the capital of the Russian company at or after incorporation of the company.

A Cyprus resident may therefore satisfy the US$100,000 threshold by making single or multiple investments. The 5% tax rate applies when the Cyprus resident's direct investment in the Russian company reaches US $100,000.

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