International Tax Associates warns of Russian double tax burden

Taxation of income from Russian mutual funds for Cyprus-based investors is set to rise from 0% to 10% and 20%, depending on assets.

Russia’s Ministry of Finance has introduced an amendment to the original agreement on avoiding double taxation between Russia and Cyprus, finalised in 2009. The new version will raise taxes on mutual funds and may affect demand for Russian funds from Cyprus-based investors. The new rules will see taxation on income from traditional Russian mutual funds for Cyprus-based investors rise to 10% from its current level of 0%. Real-estate funds will be taxed at an even higher rate of 20%. The law came into effect in April, but will be enforced as of January 1 – the official start of the tax year.

Roustam Vakhitov (pictured), head of tax consulting department at International Tax Associates, part of financial firm UFS Investment Group, explains that the original agreement between the o countries stipulated that companies based in Cyprus would have to pay taxes only on dividend, interest and royalty payments, or if they have a permanent establishment in Russia.

Loophole

But the rules for income generated from mutual funds were different. “If they invested through a Russian mutual fund, they would not have to pay taxes in either of the countries,” Vakhitov says.

“This was a loophole and went against the intended rules of the double tax treaty, which caused the amendments.”

As a result, Cypriot investors in Russia who used to receive income from Russian mutual fund holdings in their entirety, will now lose either 10% or 20% of this income to tax, payable to the Russian federal budget.

Both tax levels are set in accordance with the Russian law. The 10% tax payable on mutual funds investing in traditional assets, such as equity and fixed income instruments, is equal to the tax on dividend payments. The higher 20% tax on real-estate funds is equal to the taxation of real-estate holdings in Russia.

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