Ukraine dis­solves dou­ble tax treaty, los­ing $300m a year

Financial Mirror (Cyprus) - - FRONT PAGE -

Ukraine’s Prime Min­is­ter Arseniy Yat­se­niuk said last week that his coun­try was los­ing about $300 mln a year to tax-free in­vest­ments in Cyprus, an ar­gu­ment he used to jus­tify the abo­li­tion of the present dou­ble-tax­a­tion avoid­ance treaty.

This is the sec­ond blow to the strug­gling Cyprus econ­omy in a month, with Rus­sia’s Pres­i­dent Vladimir Putin in­tro­duc­ing a bill last month that aims to repa­tri­ate Rus­sian-owned in­vest­ments on the is­land as of Jan­uary 1, 2015, within the con­text of the “de­off­sho­ri­sa­tion” plan.

Yat­se­niuk has had his sights on Cyprus for quite some time, al­leg­ing that cronies and rel­a­tives of ousted Pres­i­dent Vik­tor Yanukovych, as well as pro-Rus­sia oli­garchs had set up com­pa­nies on the is­land used for cap­i­tal flight.

Dur­ing last Wed­nes­day’s Cab­i­net meet­ing, “the de­nun­ci­a­tion of a con­ven­tion be­tween Ukraine’s gov­ern­ment and the Repub­lic of Cyprus” was at the top of the agenda and was promptly ap­proved.

Yat­se­niuk said that when this con­ven­tion was signed in 2012, it was meant to pro­tect the wealth­i­est part of the pop­u­la­tion, since it in­cluded a 0% tax rate on the sale of prop­erty.

“Since the prop­erty was sold via off­shore com­pa­nies, tax was paid nei­ther in Ukraine, nor in Cyprus. That’s why the gov­ern­ment is ad­dress­ing par­lia­ment to back the de­nun­ci­a­tion of this doc­u­ment,” he said.

How­ever, ton­ing down his rhetoric, Yat­se­niuk said that the Ukrainian gov­ern­ment wants to rene­go­ti­ate a new treaty with Cyprus, some­thing which gov­ern­ment of­fi­cials in Nicosia have con­firmed.

The gov­ern­ment in Kiev said it will im­me­di­ately start ne­go­ti­a­tions with Cyprus on a new treaty that will com­ply with the stan­dards of the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment in Europe (OECD),” a bench­mark al­ready used by Cyprus for other treaties.

Rus­sian Pres­i­dent Vladimir Putin has ap­proved a bill to “de­off­sho­rise” busi­nesses, whereby Rus­sian share­hold­ers will be re­quired to pay taxes on the re­tained earn­ings of for­eign com­pa­nies in which they hold a con­trol­ling stake. This pri­mar­ily ap­plies to com­pa­nies regis­tered in off­shore or any for­eign ju­ris­dic­tions.

The aim is “to shrink the shadow econ­omy in Rus­sia and re­trieve cap­i­tal that was pre­vi­ously taken out of the coun­try. In light of low un­em­ploy­ment and the fact that pro­duc­tion ca­pac­ity is loaded at a vir­tual max­i­mum, this fac­tor is be­ing con­sid­ered as one of the key growth fac­tors in the com­ing years,” said An­ton Soroko, an an­a­lyst at the Fi­nam in­vest­ment hold­ing.

Ac­cord­ing to Soroko, once it is re­turned to Rus­sian ju­ris­dic­tion, this cap­i­tal can be in­vested in the real sec­tor, serve to cre­ate jobs, and put the Rus­sian econ­omy on a path to­ward sus­tain­able eco­nomic growth.

When pre­par­ing the bill, Rus­sian legislators took into con­sid­er­a­tion amend­ments sug­gested by the gov­ern­ment and co­or­di­nated with big Rus­sian business. In its orig­i­nal ver­sion, the bill re­quired own­ers to pay taxes on the profit gen­er­ated by for­eign com­pa­nies in which they own a 50% stake. That re­quire­ment was to last for two years, after which the thresh­old would have been low­ered to 25%. How­ever, State Duma deputies ad­justed the bill for its sec­ond read­ing, re­duc­ing the tran­si­tion pe­riod by a year.

Ac­cord­ing to Natalya Kuznetsova, a part­ner at PwC and di­rec­tor of the In­ter­na­tional Tax Struc­tur­ing Group, business own­ers are not the only ones who will find that the new law cre­ates prob­lems for them.

“This law threat­ens to in­crease the costs of com­pli­ance in all cor­po­rate struc­tures and the struc­tures of business own­ers. But it could also af­fect the mid­dle class, be­cause many mem­bers of the mid­dle class have also in­vested their sav­ings abroad through off­shore com­pa­nies,” said Kuznetsova.

Ac­cord­ing to Rus­sian pro-gov­ern­ment me­dia, in 2014, among the lead­ers in for­eign in­vest­ment in Rus­sia were the ‘big three’ off­shore des­ti­na­tions: Cyprus ($2.9 bln), Lux­em­bourg ($1.9 bln), and the Bri­tish Vir­gin Is­lands ($1.05 bln).

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