I am delighted to present the first issue of our "Cyprus Tax Headlines", a brief free-of-charge summary of selected tax developments in Cyprus and abroad that may have implications for Cyprus holding and finance structures. Given the diversity of structures in use, a publication such as this cannot cover every detail. I hope you will find this new publication helpful and interesting.

Andreas Neocleous

US-Cyprus Treaty

On 10 September the office of Associate Chief Counsel of the US Internal Revenue Service announced that a Cyprus-resident holding company qualified for benefits under the US-Cyprus double tax treaty ("Treaty") and the reduced tax rate on dividends from "qualified foreign corporations", despite not meeting the share ownership requirements stipulated in the Treaty.

Section 1(h)(1) of the Internal Revenue Code (the "Code") generally provides that a taxpayer's "net capital gain" for any taxable year will be subject to specific reduced rates. The 2003 Act added section 1(h)(11), which provides that net capital gain for purposes of section 1(h) means net capital gain (determined without regard to section 1(h)(11)) increased by "qualified dividend income." Qualified dividend income means dividends received during the taxable year from domestic corporations and "qualified foreign corporations." Section 1(h)(11)(B)(i).

One of the requirements for this section to apply is that the dividends must have been received from a country whose treaty fulfils the "treaty test". In order for the Cyprus company to meet the criteria of the "treaty test", it had to be ascertained whether all the requirements of the US-Cyprus treaty were met, and in particular whether the Limitation of Benefits (LOB) clause of the treaty was triggered. In order to qualify for the benefits of the treaty a Cyprus corporation must be more than 75 per cent owned by individual residents of Cyprus, and meet certain other requirements, unless it is demonstrated that the establishment, acquisition and maintenance of the Cyprus corporation and the conduct of its operations are not principally aimed at obtaining benefits under the treaty.

In the case in question the IRS agreed that the Cyprus company could be considered as a "qualified foreign corporation" as its incorporation was not solely driven by tax reasons, particularly qualification for the benefits of the treaty. Although the reasoning behind it was not explained, the case highlights the existence of this relatively unusual and potentially valuable exemption.

India-Cyprus Treaty

On 1 November the Indian tax authorities designated Cyprus as a notified jurisdictional area under section 94A of the Indian Income-tax Act of 1961. This means that transactions carried out by Indian taxpayers with entities based in Cyprus will now come under increased scrutiny from the Indian tax authorities and a withholding tax will be imposed on payments by Indian taxpayers to recipients in Cyprus.

It is understood that the Indian decision to designate Cyprus as a notified jurisdictional area arises from a disagreement over the interpretation of the exchange of information provisions in the double taxation convention between the two countries, with the Cyprus authorities having declined to respond to certain requests for information on the grounds that they did not meet the requirements of the convention, and the Indian authorities having imposed the designation in order to apply pressure to Cyprus to reconsider. In addition, the Indian authorities have for some years been attempting to renegotiate the double taxation convention, which is extremely beneficial as it allocates taxing rights for capital gains realized on investments to the country of residence of the alienator (Cyprus generally exempts gains from the alienation of investments), and the designation is also seen as a means of applying pressure to Cyprus in this regard.

A delegation from Cyprus visited India towards the end of November in order to resolve the issues and it was agreed that the "notified jurisdictional area" status can be lifted immediately once effective mechanisms are put in place to allow the exchange of information by including the provisions of article 26 of the OECD Model Tax Convention in the Cyprus-India double tax treaty and by improving channels of communication in order to facilitate swift and effective responses to requests for information. Rescission of notified jurisdictional area status will have retroactive effect from 1 November 2013, the date when the notification was issued.

EU Parent Subsidiary Directive Amendment

On 25 November the European Commission adopted a proposal to amend the Parent Subsidiary Directive (2011/96/EU) (the "Directive") in order to counter tax evasion and aggressive tax planning within the EU. It is intended to introduce a uniform general anti avoidance rule which will deny the benefits of the Directive to tax structures that are deemed to be "wholly artificial" and to amend the Directive to prevent the use of hybrid loan instruments to create a tax deduction in one Member State and exempt income in another.


The Russian Duma has approved a law amending the Russian Tax Code, to require disclosure of the ultimate beneficiaries of income from securities deposited in accounts of non-Russian nominees and custodians in order to qualify for treaty benefits. The person paying the income is responsible for reporting the information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.