The finance ministry, understandably, would have been greatly relieved that an agreement was reached on the first day of talks with the Russian government and a protracted round of negotiations was avoided. Two days of talks had been scheduled – Monday and Tuesday – but the deal was sealed on the first day, suggesting the two sides had gone into the talks looking for a compromise.
This was not the impression given seven days earlier, when Russia’s foreign ministry issued a terse announcement saying it planned to denounce the double taxation treaty because the Cyprus government had refused face-to-face negotiations for a new agreement. A senior source at Cyprus’ finance described the announcement as “provocative” and “not an accurate reflection of reality,” although within a few hours the holding of talks in Moscow was announced.
If the Russian ministry’s intention was to speed up the signing of a new agreement, by threatening the scrapping of the treaty, it succeeded. With Petrides in Moscow, everything could be finalised on the spot without endless to-ing and fro-ing by ministry civil servants. The double taxation treaty has been preserved, but two of its main articles amended as Moscow had demanded, a 15% tax on the income paid in dividends and interest from the territory of the Russian Federation to the Cyprus Republic.
The Cyprus government secured exemptions for pensions funds, insurance companies as well as company and government bonds; warrants were also exempted. The finance ministry expressed its satisfaction with the outcome as its priority is to preserve the double taxation treaties it has with a host of countries. It also noted that the updating of these treaties, in line with the changing international conditions was a necessity.
This is a sensible approach. The Russian Federation had every right to demand amendments to the treaty, especially now that its economy is going through a very difficult period. Preserving the treaty even with terms that might reduce Cyprus’ attractiveness as a tax jurisdiction for Russian companies, is a much better option than the deal being scrapped. With an agreement, businesses know where they stand and can adjust their tax planning accordingly.
The agreement will also have silenced all the opposition parties, which had claimed Russia’s demands had been sparked by the closer ties the Cyprus government had forged with the US. It was punishment, according to Akel, for the government’s Westward shift, the party ignoring the dire straits the Russian economy was in, and the fact President Putin has for years spoken of the need to repatriate Russian businesses based abroad.
The amendment of the double taxation treaty might not have been ideal for Cyprus, but it was the best that could have been achieved under the circumstances and a significantly better outcome than its abolition.