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The Ministry of Finance implemented Vladimir Putin’s March promise to unilaterally withdraw from agreements with low-tax jurisdictions – the ministry has announced preparations for the denunciation of the double taxation treaty with Cyprus. With the decision, the authorities intend to push holdings to move to Russian “offshores” – special administrative regions. The unexpected step will disrupt the existing financial flows for business, Kommersant writes. However, experts told the newspaper they expect Russia and Cyprus to conclude a new tax agreement.

Negotiations with Cyprus were difficult, but observers still expected the agreement to get an update. It was reported that a new agreement would be signed during Russian Foreign Minister Sergey Lavrov’s visit to the island. On Monday, anonymous negotiators at the Cypriot Finance Ministry were surprised by the decision of their Russian colleagues, Kommersant writes.

According to various estimates, under the agreement, 1.4 trillion rubles ($19.16 bln) were moved from Russia to Cyprus in 2018, and 1.9 trillion rubles ($26 bln) in 2019. The Finance Ministry considers it a scheme under which revenues of Russian origin are paid to Russian beneficiaries through a transit jurisdiction.

Cancelling the agreement on the avoidance of double taxation with Cyprus means that taxes on many transactions with companies registered there will have to be paid both in Russia and in Cyprus, the newspaper noted. “Rejecting the agreement with Cyprus is a shock for Russian business. Financial flows will definitely change their course,” Head of tax dispute resolution group at Bryan Cave Leighton Paisner Alexander Erasov told Kommersant.

Meanwhile, some experts believe that the countries might conclude a new agreement in the future. “Negotiations with Cyprus have been going on for a long time, it cannot be ruled out that new conditions will be specified in a new agreement. The parties might have considered it inexpedient to make a large number of amendments to the previous document,” Director of Tax and Legal Consulting at KPMG in Russia and the CIS Alexander Tokarev told Kommersant.

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