Following the visit of Russian President Medvedev to Cyprus and the signing of the Protocol to the double taxation agreement on behalf of the governments of both countries, it was expected that the amended treaty would be ratified by the Parliaments of the two countries before the end of 2010 and would become effective from 1 January 2011. This timetable was not realised and, assuming the amended treaty is ratified during 2011, it will take effect on 1 January 2012.

The new agreement retains the highly favourable tax provisions between the two countries and will strengthen Cyprus's position as the portal of choice for both inbound and outbound investment between the Russian Federation and the rest of the world.

The amendments introduced by the Protocol extend the information exchange arrangements between the two countries' respective tax authorities in line with the OECD Model Tax Convention, and include strong safeguards to protect taxpayers.

The Protocol also aligns the taxation of capital gains with the basis set out in the OECD Model Tax Convention. Under the new rules taxation of capital gains realised on the sale of shares in a property rich company will be vested in the country where the property is located. The exclusive taxing right will remain with the country of residence of the seller if the disposal qualifies as a corporate reorganisation, or if the shares are listed on a recognised stock exchange or the seller is a pension fund, provident fund or the government of either country

The Protocol provides for a grace period of at least four years as regards the new arrangements regarding taxation of capital gains. The relevant amended article will not become effective until the first day of the calendar year following four years after the protocol as a whole takes effect. This will be 1 January 2016 at the earliest, giving time to consider and implement measures to mitigate any negative impact of the change. If you believe that this change may affect your interests, please get in touch with your usual contact at Andreas Neocleous & Co and we shall be pleased to advise you.

The Protocol clarifies the definition of dividends, regarding which there had previously been some uncertainty. Distributions from mutual funds and similar collective investment vehicles (other than those primarily investing in immovable property) will be subject to the normal withholding tax rates applying to dividends. Distributions from shares held in the form of Depositary Receipts will also be taxed as dividends.

The definition of interest has been aligned with the OECD definition and includes income from debt-claims of every kind.

One of the most important aspects of the Protocol is that there is no change to the extremely favourable withholding tax rates applying to cross-border payments of dividend, interest and royalties. Furthermore, the Russian Federation has undertaken that, by the time the new provisions regarding taxation of capital gains come into force, it will have adopted the OECD Model Tax Convention provision for capital gains in its tax treaties with all states which are significant investors in the Russian Federation.

The Russian authorities are expected to announce the removal of Cyprus from any Russian tax "blacklists" with effect from the date the Protocol takes effect, making dividends received by Russian shareholders from qualifying

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