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