Finance ministry officials in the Republic of Cyprus say they were caught by surprise when Russia announced it would scrap a double tax treaty, with Moscow suggesting there was no other alternative after talks had failed.
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Russian President Vladimir Putin proposed earlier this year a 15% tax on all interest and dividend payments leaving Russia to combat capital outflows.
Cyprus submitted counter proposals
An official request to the Republic of Cyprus was made in early April, with Nicosia rejecting the terms of renegotiating the treaty and offering to propose new counter proposals after a mid-June deadline.
Moscow’s initial measures, intended to become applicable on 1 January 2021, were announced following the outbreak of COVID-19, with the Russian finance ministry putting a number of countries on notice as far back as March, including Cyprus, Luxembourg and Malta.
“Cyprus is now waiting on Russia. We have put forward some positions and we seek to continue our contacts and reach an agreement since we did not officially agree on a deadlock", finance ministry sources said according to the Cyprus News Agency.
Moscow rejected counterproposals
Asked whether Moscow may be acting out of revenge to punish Nicosia over recent US-friendly actions, the government spokesperson said 'no way'
But in another statement on Monday, Russian Deputy Finance Minister Alexei Sazanov said talks with the Republic of Cyprus on modifying the tax agreement had failed, saying Moscow was getting ready to denounce the DTT after finding Cypriot proposals “unfeasible.”
“Having analyzed them, the Russian Finance Ministry arrived at a conclusion that they essentially dilute and make unfeasible the anticipated effect of the Russian side from undertaken measures to support the national economy and social programs,” it was reported by the Russian News Agency TASS.
The Russian official said Moscow was ready on August 3 to initiate the process of withdrawing unilaterally from the double taxation avoidance agreement with Cyprus.
It was not clear whether talks were set to continue, but according to CNA, a finance ministry statement on Monday said more talks were scheduled to take place early next week, headed by Finance Minister Constantinos Petrides.
Nicosia: economic issue, not political
Cypriot government spokesperson Kyriakos Koushos went on state radio Tuesday morning saying he did not see political motives behind Moscow's move.
"This is strictly an economic issue, and there is no political basis for it," Koushos said.
Asked whether Moscow may be acting out of revenge to punish Nicosia over recent US-friendly actions, the government spokesperson said "no way," citing the fact that other countries were facing similar issues with Russia.
Moscow determined to go it alone
Putin had warned countries that where agreement couldn’t be reached with a tax treaty partner over the proposed new tax rates for dividend and interest payments, the tax treaties in question were to be unilaterally terminated.
According to a report by Reuters, Moscow was moving to encourage Russian businesses registered on the island to transfer soon-to-be unprofitable holding structures back home.
But any significant exodus would be a blow for the Cypriot economy, the report added.