Drop in the oil revenue is driving the Russian government to look for any potential replacement. The Russian government took on three major jurisdictions there represents the majority of foreign investments in the Russian economy like Cyprus, Malta, and Liechtenstein. How come that the tiny island in the Eastern Mediterranean becomes one of the major investors in the Russian economy? The answer is easy to figure out. About 20 years ago the Cyprus governments have managed to create a business-friendly environment that has attracted the Russian businesses recovering from the Russian government default back in 1998 when the Russian Rouble had a substantial drop in its value. Cyprus has quickly become the number one jurisdiction that was intensively used by Russian businesses to channel their money into Russia.
However, nothing lasts forever. Time changed and the Russian government wants to change the provisions of the Cyprus Double Tax Agreement by increasing the withholding tax rate that Russian companies pay to Cyprus shareholders. The increase in the dividend withholding tax rate to 15% from the current range of 5% to 10% made Cyprus companies less attractive for Russian businesses. The Cyprus government is fearing of the exodus of the Russian business from Cyprus during the difficult time of COVID-19 pandemic which has already negatively affected by the Cyprus tourism industry and tightening of the eligibility criteria for the Cyprus Passport for Investment Programme that kept the construction industry alive.
Another upcoming change is the taxation of royalties at 20% comparing to the tax-free royalties at this moment.
Cyprus and Russian governments are planning to have the last round of discussions on the Cyprus-Russia DTA this month with the amendments to be signed in September by Sergey Lavrov, the long-serving Russian Foreign Minister. The Cyprus government is hoping for concessions. However, the recently improved international relations between Cyprus and the USA might make the Russian government reluctant to agree to any concessions.