Article 10(2) of the Agreement between the Republic of Cyprus and the Russian Federation for the avoidance of double taxation with respect to taxes on income and capital (as amended through 2010) provides that withholding tax on dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State shall not exceed 5% of the gross amount of the dividends if the beneficial owner has directly invested in the capital of the company paying the dividends no less than the equivalent of 100 000 Euro.
The Russian Federal Arbitration Court of the East – Siberian Circuit issued on 6 February 2014 the Judgment No. A19-2735/2013 for the application of the reduced withholding tax rate, as per Article. 10 (2) of the Double Tax Agreement.
In the case under scrutiny, Yanden Enterprises Limited, a Cypriot resident company, received shares of Sayanskhimplast LLC, a Russian resident company, through share exchange agreements. As consideration for the Sayanskhimplast LLC's shares, Yanden Enterprises Limited transferred shares held in other two subsidiaries. As a result of these arrangements, Yanden Enterprises Limited became the sole shareholder of Sayanskhimplast LLC while the subsidiaries received participations in each other.
In 2010 Sayanskhimplast LLC paid dividends to Yanden Enterprises Limited to which the Russian Company applied the reduced withholding tax of 5% pursuant to the Tax Treaty.
The Russian tax authorities contested the application of the reduced withholding tax rate and claimed that Sayanskhimplast LLC unlawfully applied this rate because the direct investment requirement in the Tax Treaty, according to which Yanden Enterprises Limited should have directly invested in the capital of Sayanskhimplast LLC the amount equivalent to at least USD 100,000, was not met.
The Court however opined that, based on article 7(3) of the Tax Code, “all unavoidable doubts, contradictions and ambiguities regarding the tax law should be construed in favour of the taxpayer”. It further explained that because the term "direct investment" is not determined clearly in the legislation, the Court rejected the arguments of the tax authorities that the acquisition of the shares of Sayanskhimplast LLC pursuant to the share exchange agreements cannot be considered a "direct investment".
The Court adjudicated, in support of the decisions of the Lower Arbitration Court of Irkutsk region and the Arbitration Court of Appeal, that Yanden Enterprises Limited could be deemed as directly invested into the share capital of Sayanskhimplast LLC the required amount and, consequently, was entitled to apply the reduced withholding tax of 5%.
This important case highlights the beneficial provisions of the Double Tax Treaty between the two countries and re-confirms the numerous advantages of employing the Tax Treaty in international transactions. Finally, this conclusion sets a clearer guideline as to how the courts examine the particular merits of each case and constitutes a precedent to other arrangements of this type.
Antonis Michaelides firstname.lastname@example.org Tel : +357 22 699 222
The Constitution of the Republic of Cyprus in Article 146 grants the Supreme Court of Cyprus exclusive jurisdiction to rule on any complaint that a decision, act or omission of any organ, authority or person, exercising any executive or administrative authority is contrary to any of the provisions of the Constitution or of any law or is made in excess or in abuse of powers vested in such organ or authority or person, including the hearing of tax appeals.
As far as tax cases are concerned, it is estimated that there are currently 5000 pending cases, each taking approximately two years to process, and another 2-2.5 thousand complaints are filed each year, numbers which are unacceptable for a European Union member state in the year 2013.
The passing of a new law for the establishment of an Administrative Court that would take over some of the obligations of the Supreme Court, including tax appeals, has been on the table for years now. With the number of pending cases reaching unprecedented levels and their trial duration outspreading to deterrent points has led the parliament to approve a bill for the creation of the new administrative court.
The said bill provides that the court will be consisted of five judges who will be based at the Supreme Court building in Nicosia and that its powers will be extended to cover inter alia the tax matters. It is expected that the establishment of the Administrative Court will significantly speed up the adjudication of cases relating to tax issues.
The government spokesman Christos Stylianides commenting on the above decision said that “…it will modernise the courts, speed up procedures, and help so that justice delivers decisions at the right time, without the extensions that create problems”.
According to the Minister of Justice Ionas Nicolaou, the government is pushing for immediate voting of this legislation, so that the Administrative Court can operate in the coming September. The Minister went further to explain that the new Court will cut the duration of tax appeal cases by one third which will essentially eliminate those exploiting delays in the current system to avoid paying their taxes. “Cases would not go on longer than nine months”, he said.
The power to consider tax cases will be transferred to the Administrative court pursuant to an amendment to the constitution. Taxand’s Take
This new development is certainly a breath of fresh air for legal professionals who have insisted for ages that the judicial system precludes justice to be done as it is fraught with unjustified delays which where undoubtedly exploited by the Cypriot taxpayers in order to postpone their obligations towards the Tax Authorities.
Considerable importance however has to be paid on the volume of obligations to be vested to the newly established Administrative court so as to avoid overloading it with thousand of cases which will for once again get stuck in the bureaucratic system of the Cypriot public authorities.
The proper administration and supervision of the Administrative Court will gravely assist the Supreme Court to put through its obligations and enable the Tax Authorities to receive their receivables in due time.
The Law Regulating Companies Providing Administrative Services and Related Matters, Law 196(I)/2012 ('the Fiduciaries Law') was enacted in December 2012 establishing a licensing and supervisory body for corporate and fiduciary services providers as per Directive 2005/ 60/EC of the European Union.
Pursuant to Cyprus's commitment to transparency and enhanced regulations, on 9 September 2013 Law 109(I)/2013 amended the Fiduciaries Law in respect to the disclosure of information on Cypriot International Trusts.
More precisely, Section 3(7) of the Fiduciaries Law (as amended) provides that Trustees and Service Providers will need to identify and verify to their respective supervisory body (i.e. Cyprus Bar Association, Cyprus Securities and Exchange Commission and the Institute of Certified Public Accountants of Cyprus) the name of the trusts, the trustees’ names at all times, the date of creation and termination of trusts and the date of any change in the law governing the trusts.
The timeframe for disclosing the above information to the competent authority for trusts established on or after 9 September 2013 is 15 days from their establishment or the adoption of Cyprus law as the governing law of the trust. As for trusts already in existence on 9 September 2013, the relevant information must be submitted within six months of the entry into force of the amending law, that is to say, before the 9th of March 2014. A notification on any subsequent changes in any of the information mentioned above must be also submitted within 15 days from the date the change took place.
Failure to do so within the above timeframes constitutes a criminal offence that entails a sentence of imprisonment for up to five years, a fine of up to EUR 350,000 or both.
It should be highlighted that the trust register maintained by the competent authority is not available to the public but may only be available for inspection by other competent authorities if requested. The authorities are currently exploring the adoption of an electronic submission system so as to expedite the process.
This development is certainly a serious step towards Cyprus's commitment to keep up with the global developments in regards to anti-money laundering compliance and enhanced transparency in an era when strict confidentiality is increasingly combated. However, Cypriot Trustees and Service Providers must be henceforth very careful in complying with the above requirements within the provided deadlines so as to operate within the requirements of the law and of course avoid any potential fines/liability.
Antonis Michaelides email@example.com Tel : +357 22 699 222