This Is The Moment When Russian Money Started Flowing Into Cyprus

There are tax havens all over the world, so why is Cyprus so special to Russia? It all goes back to a tax agreement made at the end of President Boris Yeltsin's administration in 1998.

The year is mostly remembered for the horrible collapse of the Russian economy. What's less remembered is that, in the years before the crisis, Yeltsin had been trying to reform the tax code to make it more centralized. Those reforms became more vital as the economy deteriorated.

From the Washington Post at the time quoting Russian Prime Minister Sergei Kiriyenko:

If the state does not learn to collect taxes," Kiriyenko said, "it will cease to exist." Among other things, Kiriyenko announced that Russia could get by with only one type of strategic nuclear missile in the future rather than three. Yeltsin warned of "dangerous" social tensions over unpaid wages.

But of course, there were caveats. Russian oligarchs like Roman Abramovich and his frenemy Boris Berezovsky ascended to power during the Yeltsin years, some financing his presidential campaign.

So one can only imagine that the passage of the 1998 Double Tax Treaty between Russia and Cyprus was for them, as Russia needed revenue quite badly.

The treaty stipulates that citizens of either country will not be doubly taxed on income or capital gains. Russia has a 20% corporate tax rate (capital gains are the same), Cyprus' is 10%.

Additionally, according to Bloomberg Russia billionaire reporter Rich Lesser, there is no penalty for moving money out of Cyprus, so if you want to move your money to another tax shelter, say, The British Virgin Islands, you're free to do that.

So some oligarchs do.

This treaty was just updated in the last few years, with some changes coming into effect on January 1st, 2013, according to Deloitte.

The new protocol reinforced the 1998 treaty and added some nice strengthening provisions — one of which would remove Cyprus from a so-called "blacklist" of offshore jurisdictions.

From Deloitte:

This would mean that dividends received by Russian companies from Cypriot subsidiaries can qualify for the Russian dividend participation exemption that will further strengthen the position of Cyprus as one of the most attractive jurisdictions for Russian investment.

When Cypriot politicians rejected a European bailout agreement this week, Russian Prime Minister Dmitry Medvedev made allusions to dumping the entire treaty after a meeting with the head of the European Commission, Jose Manuel Barroso.

From the Global Post:

"We have an agreement on avoiding double taxation with Cyprus but I do not know whether we need such an agreement in this case, the question may be raised of severing this treaty, of denouncing it."

Naturally, there will be some very angry very powerful people if that happens.