The Russian Finance Ministry released Letter No. GD-4-3/12689 issued on July 3, 2014, whereby it declared the taxation of contractual penalties paid by a Russian company to a Cypriot company. The Ministry of Finance referred to article 309 of the Tax Code providing that penalties for violation of contractual terms by Russian companies are treated as Russian-sourced income when paid to a foreign company.
The penalties are subject to taxation at source. According to article 11 of the Russia-Cyprus Income and Capital Tax Treaty (1998), the interest arising in Russia and paid to a resident of Cyprus should be taxed only in Cyprus. Finally, the Ministry of Finance finished that if a tax residence certificate is presented by the Cypriot resident, contractual penalties should be exempt from withholding tax in Russia.
