Nicosia's refusal to raise tax rates on interest and dividends from Russia to Cyprus to 15% led to the termination of the deal, according to Russia's Deputy Finance Minister Alexei Sazanov.
Negotiations between the countries failed to yield results after two months of ongoing talks.
“Unfortunately, today we have to admit that the talks did not yield results,” Reuters cited Sazanov as saying.
“Restructuring one’s holding structures through Cyprus will of course become disadvantageous. It will be more advantageous to transfer everything back to Russia.”
Cyprus' finance ministry commented that it sees no reason for the termination, noting that it expects negative consequences from Moscow's decision.
The tax on dividend payments to Cyprus from Russia currently ranges from 5% to 10% depending on the asset contribution of a Cypriot resident entity to the Russian company making the payments, and is scheduled to increase to 15% or 20% after Russia's withdrawal from the agreement.
The double tax agreement between the countries has been in force since 1998, and has provided attractive incentives for Russians to use Cypriot banks. According to various estimates, more than 1.4 trillion roubles (approximately $18.9 billion) was transferred to Cyprus from Russia in 2018, followed by 1.9 trillion roubles (approximately $25.65 billion) in 2019.
Russian President Vladimir Putin suggested increasing the tax on dividends withdrawn to foreign accounts in late March, suggesting the revenue raised from the manoeuvre would go to support families with children and the unemployed.
Cyprus is the first country to have faced talks with Russia over a new tax treaty. Other low-tax regimes, such as Malta and Luxembourg, are expected to renegotiate their agreements with Moscow in the near future.