The protocol amending the 1998 tax treaty between Russia and Cyprus includes special provisions related to real estate investment.
Russian commentators believe that more than half of current property investment projects in Russia involve offshore companies based in Cyprus.
The most important change in the treaty relates to source-state taxation of capital gains in companies which predominantly hold real estate as their main activity: where more than half the company’s assets comprise Russian immovable property, Russia will be able to apply its domestic capital gains tax. This conforms with articles contained in the standard OECD model tax convention. Prior to this change, capital gains taxing rights were applied in the country of residence of the selling company.
In addition, real estate investment trusts and funds will have their dividends treated as being income from real estate for the purposes of the treaty.
Both Cyprus and Russia aim to ratify the protocol without delay in order that it can take effect from January 1, 2011, but the amendments to the provisions on capital gains tax will only come into effect four years after ratification and the transition period will therefore extend at least until January 2015.
It should also be noted that, whilst the amendments include provisions for tax information exchange and other assistance on collection of taxes in accordance with the OECD standard, these can only take effect after Cyprus has amended its own tax legislation, which currently only allows for such assistance to be extended to other EU countries.
By Tatiana Smolenskaya, Moscow, Tax-News.com