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8 Oct, 2010 13:48

Cyprus agreement to shake up real estate

A new tax information sharing agreement with Cyprus will shake up the Russian real estate development sector, as developers look for new ways to minimize taxes.

Cyprus is a small island in the Mediterranean, and is Russia’s biggest foreign investor. However, most of the capital flowing into Russia is not Cypriot, its Russian money coming back home from an offshore tax haven.

Easy to get, with minimal taxes for business, Cyprus is a traditional offshore destination for Russian companies. It has previously been so uncooperative that it was black listed by the authorities in Moscow. But change is on the way. A new double taxation avoidance agreement will include extensive exchange of corporate financial information, according to Ekaterina Lazorina, Partner at PricewaterhouseCoopers Russia.

“It will mean a lot for restructuring of Russian business, in terms of putting more substance abroad, in terms of restructuring management structures, really, in terms of, lets say, tax planning, maybe looking at what stands behind each transaction – what is the business substance. I think it will be a very important change in the minds of the Russian businessmen.”

Analysts say, no less then half of the Russian real estate business resides in Cyprus. A common practice has been to register a separate offshore firm as the owner of a Russian real estate project. It makes it easier to sell the construction by selling as part of the offshore company. While in Russia this kind of deal would be taxed 20%, in Cyprus it is not subject to duty. Analysts such as Andrew Zakrevsky, Senior Vice-President at Knight Frank, say developers will do everything possible to transfer operations to other off-shore locations before the new agreement comes in force in 2014.

“They will have to study new jurisdictions, and develop new schemes. But the opportunities that offshore companies provide for the real estate business, for example, are so high, that developers will devote time and effort to look for new loopholes. “

VTB President Andrei Kostin said the agreement with Cyprus could be expected to see Russian business relocate to Russia over time.

“Of course, the taxes are a bit lower here, but they are already have been implemented and there is no zero taxation in Cyprus. But there were a couple of questions, one including the disclosure of information about the company and second about particularly purchases of real estate in Russia, which is now to be resolved. So it just happened historically that Russian business not only – partly for the reason of taxation, partly for the reason of providing additional security for investment actually based in Cyprus.

I think we cant change it very quickly, so I think number one task is to get more investment from Cyprus into Russia – that’s what’s happening I think, Cyprus is one of the largest investors in Russia – and I think gradually Russian business will start probably to move to Russia, but at the end of the day if we have a normal tax regime, if we have a normal exchange of information, I think it doesn’t very much matter.”

Russia’s Finance ministry is to begin work with other European tax friendly countries on greater transparency and information exchange. That leaves places such as the Cayman islands or Bahamas, which may soon become the nearest destinations to offer a safe harbor from the tax authorities.