END OF AN ERA FOR ECONOMIC RELATIONS WITH RUSSIA

Filenews 31 July 2020 -Antonis Antoniou

Cyprus-Russia economic and business relations will enter a new era from 1 January 2021, 

All efforts to diversify the Russian federation's intentions to change the double taxation agreement have been exhausted by the government. A last effort was made yesterday, by telephone communication between the President of the Republic Nicos Anastasiades and his counterpart Vladimir Putin, however, the outcome was not the desired one for the Cypriot side. According to information from the Presidential Palace, it was not possible to change the decision on additional taxation of companies of Russian interests based in Cyprus, nor to have significant exemptions of companies that would not be taxed with the 15% imposed by the Russian federation on dividends and interest.

As competent sources told "F", the same attitude taken during the negotiations at the technocratic level was also political, with the Russian president reiterating to Nicos Anastasiades that it is a political decision aimed at improving economic data in the Russian federation.

Against this standards, it seems that the only solution left to the Cypriot Government is to accept the revised agreement with any consequences it may have in the field of professional services and in the general economic relations between the two sides. At the technocratic level, efforts have focused on making some exceptions in the implementation of the provisions of the revised agreement. Although the Russians accepted some exceptions, however, they are considered insignificant and with little positive effect.

What are the Russians going to do?

Essentially from 1 January 2021, apart from dramatic developments, a large capital of the Cypriot economy, on which the development of Cypriot-Russian business relations was largely based, is changing drastically. Attention is now turning to the next day and the reaction of the Russian businessmen themselves who are directly affected. Will they move their companies' headquarters to other European countries or even back to Russia or stay in Cyprus, paying increased taxes?

In relation to destinations considered competitive, it is estimated that similar agreements such as Cyprus will be made with Malta and Luxembourg, while for the cases of Switzerland and the Netherlands at this stage it appears that no action will be taken in this direction. If the above scenarios are verified, practically the two countries will have a comparative advantage in attracting Russian companies to set up. On the other hand, these are countries where the cost of providing such services is much higher than in Cyprus and this is obviously a factor that the affected entrepreneurs will take seriously before making their final decisions. There is also the possibility that Russian companies established in Malta and Luxembourg will choose Cyprus as its base following these developments.

A similar situation had been created in 2013, and then, despite the haircut, the increase in the corporate tax to 12.5% and the general climate of anger that prevailed, most Russian companies chose to maintain their presence on the island, although they transferred most of their deposits outside the Cypriot banking system for various reasons.

The revised agreement if accepted and formally signed is expected to be signed in September with the descent of Foreign Minister Sergei Lavrov in Cyprus and come into effect from 1 January 2021.