Eastern Europe

Russia Scraps Tax Deal With Cyprus…Too Much Money Going Offshore

Russia Scraps Tax Deal With Cyprus...Too Much Money Going Offshore
Columns in Roman gymnasium, Salamis, Northern Cyprus
Image by Michal Klajban

Russia is ending its tax treaty with the Mediterranean island of Cyprus, forcing an end to favorable tax treatment for wealthy Russians moving money out of the country offshore to tax haven jurisdictions. Cyprus was a favorite due to weak money-laundering controls and is reported to control vast amounts of stolen funds from the Russian Federation.

The Ministry of Finance implemented Vladimir Putin’s March promise to unilaterally withdraw from agreements with low-tax jurisdictions – the ministry has announced preparations for the denunciation of the double taxation treaty with Cyprus. With the decision, the authorities intend to push holdings to move to Russian “offshores” – special administrative regions. The unexpected step will disrupt the existing financial flows for business, Kommersant writes. However, experts told the newspaper they expect Russia and Cyprus to conclude a new tax agreement, reported Russian state news agency TASS.

Negotiations with Cyprus were difficult, but observers still expected the agreement to get an update. It was reported that a new agreement would be signed during Russian Foreign Minister Sergey Lavrov’s visit to the island. On Monday, anonymous negotiators at the Cypriot Finance Ministry were surprised by the decision of their Russian colleagues, Kommersant writes.

According to various estimates, under the agreement, 1.4 trillion rubles ($19.16 bln) were moved from Russia to Cyprus in 2018, and 1.9 trillion rubles ($26 bln) in 2019. The Finance Ministry considers it a scheme under which revenues of Russian origin are paid to Russian beneficiaries through a transit jurisdiction.

“Rejecting the agreement with Cyprus is a shock for Russian business. Financial flows will definitely change their course,” Head of tax dispute resolution group at Bryan Cave Leighton Paisner Alexander Erasov told Kommersant.

The standard modes operandi for Russian oligarchs in the past was to make money inside Russia, then move it out of the country where no one could touch it. Cyprus was a favorite landing spot.

Russian President Vladimir Putin has been working at returning capital to the country, sometimes by force of threat.

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