TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF CYPRUS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME（三） ARTICLE 13 Interest 　　Under paragraphs (1) and (2), as a general rule, interest derived and beneficially owned by a resident of a Contracting State from sources within the other Contracting State may be taxed by both Contracting States, but the tax in the Contracting State of source may not exceed 10 percent of the gross amount of the interest. However, under paragraph (3), interest is exempt from tax in the Contracting State of source if it is derived 　　(1) by the other Contracting State, or an instrumentality of that other Contracting State which is not subject to tax on its income by that Contracting State, 　　(2) by a resident of the other Contracting State with respect to a debt obligation which is guaranteed or insured by that other Contracting State or instrumentality, 　　(3) by a bank or other financial institution, or 　　(4) by a resident of that other Contracting State with respect to a debt obligation arising in connection with the sale of property or the performance of services. 　　Under paragraph (4), the provisions of paragraphs (2) and (3) do not apply if the beneficial owner recipient of the interest is a resident of a Contracting State who has a permanent establishment in the other Contracting State, and the indebtedness giving rise to the interest is effectively connected with that permanent establishment. In that case, the interest will be taxed under the provisions of Article 8 (Business Profits). 　　Under paragraph (5), where a person pays interest to a related person (as defined in Article 11 (Related Persons)) and the interest exceeds the amount which would have been paid to an unrelated person, then only the portion of the interest which would have been paid to an unrelated person will be subject to the provisions of this Article, and the excess may be taxed by each Contracting State under its law, including, where applicable, the provisions of this Convention. In the case of the United States, for example, the excess portion may be treated as a dividend, in which case the provisions of Article 12 (Dividends) will apply. 　　Paragraph (6) defines the term "interest" for purposes of the Convention. The term means income from bonds, debentures, government securities, notes or other evidences of indebtedness, whether or not secured and whether or not carrying a right to participate in profits, and any other debt-claim. The term also includes any other income which is assimilated to income from money lent under the taxation laws of the Contracting State in which the income has its source. 　　Paragraph (7) provides that interest paid by a resident of a Contracting State may not be taxed by the other Contracting State unless 　　(1) it is paid to a resident of that other Contracting State, 　　(2) the interest is treated as income from sources within that other Contracting State under paragraph (2) of Article 6 (Source of Income), 　　(3) the recipient of the interest has a permanent establishment in that other Contracting State and the indebtedness giving rise to the interest is effectively connected with that permanent establishment, or 　　(4) the other Contracting State is the United States, and the person paying the interest is a Cyprus corporation which derives 50 percent or more of its income from one or more permanent establishments which that corporation has in the United States. 　　In the latter case, the limitation on the rate in paragraph (2) does not apply to any tax which the United States may impose on that interest. 　　This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of Taxation). Thus a Contracting State may tax the interest income of a resident of the other Contracting State without regard to any limitations in the Convention, if the resident of that other Contracting State is also a citizen of the first-mentioned State. ARTICLE 14 Royalties 　　Under paragraph (1), royalties derived from sources within one Contracting State and beneficially owned by a resident of the other Contracting State are exempt from tax by the firstmentioned Contracting State. The source of a royalty is defined in paragraph (3) of Article 6 (Source of Income). 　　The term "royalties" is defined in paragraph (2) as payments of any kind for the use of, or the right to use, copyrights of literary, artistic, or scientific works, motion pictures, and works on film, videotape or other means of reproduction for radio or television broadcasting, patents, designs, models, plans, secret processes or formulae, trademarks or other like property or rights, or knowledge, experience or skill (know-how). The term also includes gains derived from the sale, exchange or other disposition of property or rights described in the preceding sentence, to the extent that the amounts realized are contingent on the productivity, use or disposition of the property or right. 　　Paragraph (3) provides that if the beneficial owner of the royalties is a resident of a Contracting State who has a permanent establishment in the other Contracting State, the　limitations of paragraph (1) will not apply if the property or rights giving rise to the royalties are effectively connected with the permanent establishment. In such a case the provisions of Article 8 (Business Profits) and not this Article will apply. 　　Under paragraph (4), if a person pays a royalty to a related person (defined within the meaning of Article 11 (Related Persons)) which is greater than the royalty which would have been paid to an unrelated person, the provisions of this Article apply only to the amount which would have been paid to an unrelated person. Each Contracting State may tax the excess under its own law, including any applicable provisions of the Convention. For example, the excessive portion may be treated as a dividend or as interest, depending on the circumstances and the laws of the Contracting State imposing the tax. This Article is subject to the provisions of the saving clause of paragraph (3) of Article 4 (General Rules of Taxation). Thus, royalty income derived by a resident of one Contracting State may be taxed by the other Contracting State without regard to the limitations of this Article if that resident is a citizen of that other Contracting State. ARTICLE 15 Income From Real Property 　　Paragraph (1) provides that income from real property may be taxed in the Contracting State in which the real property is situated. This rule also applies to income from the usufruct, direct use, letting or use in any other form of real property. This paragraph does not grant an exclusive taxing right to the Contracting State of the situs of the property. 　　"Real property" is not defined in the Convention. According to paragraph (2) of Article 2 (General Definitions), therefore, the term is defined under the laws of the Contracting States. 　　This paragraph, however, specifies that the term includes royalties and other payments in respect of the exploitation of natural resources, as well as gains from the sale, exchange or other disposition of such property or of rights giving rise to such royalties or other payments. The term does not include interest on indebtedness secured by real property or by a right giving rise to payments in respect of the exploitation of natural resources. 　　Under paragraph (3), a resident of a Contracting State who is subject to tax in the other Contracting State under paragraph (1) may elect to compute the tax for any taxable year on a net basis as if the resident were engaged in trade or business in the other Contracting State. The election is binding for the taxable year of the election and all subsequent taxable years unless the competent authorities agree to the taxpayer's request to terminate the election. ARTICLE 16 Gains 　　Paragraph (1) states the general rule that a resident of a Contracting State is exempt from tax in the other Contracting State on gains from the sale, exchange or other disposition of assets. 　　Subparagraphs (a) through (c) provide exceptions to this rule. 　　Under subparagraph (a), the United States may tax a resident of Cyprus on gain on the sale, exchange or other disposition of real property (referred to in Article 15 (income from Real Property)) situated in the United States, and a United States real property interest. Under paragraph (3), a United States real property interest is considered to be situated in the United States. Thus, the United States retains the right 10 exercise its full taxing rights under the Foreign Investment in Real Property Tax Act (Code section 897). This is confirmed by the statement in paragraph (2) that the provisions of Article 15 (Income from Real Property) apply in determining the United States tax on the gain described in this subparagraph, since that Article does not impose any limit on the taxing rights which may be exercised by the Contracting State in which real property is situated. 　　Under subparagraph (b), Cyprus may tax a resident of the United States on gain from the sale, exchange of other disposition of real property (referred to in Article 15 (Income from Real Property)), which is situated in Cyprus, and an interest in real property situated in Cyprus. Under paragraph (3), an interest in real property situated in Cyprus is considered to be situated in Cyprus. Under Cyprus law, Cyprus may tax a resident of the United States on gain from the sale, exchange or other disposition of shares in a Cypriot corporation which is a real property holding company which holds real property situated in Cyprus. This Article confirms the right of Cyprus to impose that tax on a resident of the United States under the Convention. The provisions of Article 15 (Income from Real Property) apply in determining the Cypriot tax on the gain described in this subparagraph. 　　Under subparagraph (c), a Contracting State may tax a resident of the other Contracting State on gain derived from the sale, exchange or other disposition of property which forms part of the business property of a permanent establishment which that resident has in the firstmentioned Contracting State, or which pertains to a fixed base available to that resident in the first-mentioned Contracting State for the purpose of performing independent personal services. The gains referred to in this subparagraph include gains from the alienation of the permanent establishment (alone or with the whole enterprise) or the fixed base. The provisions of Articles 8 (Business Profits), 15 (Income from Real Property) and 17 (independent Personal Services), as the case may be, apply in determining the tax on the gain described in this subparagraph. This Article is subject to the provisions of the saving clause of paragraph (3) of Article 4 (General Rules of Taxation). Thus, a Contracting State may tax a resident of the other Contracting State on gains which are otherwise exempt from tax in the first-mentioned State under paragraph (1) if that resident is a citizen of that first-mentioned State. ARTICLE 17 Independent Personal Services 　　In dealing with the taxation of income from personal services, the Convention distinguishes between independent personal services (Article 17) and dependent personal services (Article 18). The Convention also provides special rules for individuals who are artistes and athletes (Article 19), corporate directors (Article 20), students and trainees (Article 21) and Government employees (Article 22). Pensions in respect of personal service income are dealt with in Articles 22 (Governmental Functions) and 23 (Private Pensions and Annuities). 　　Paragraph (1) provides that an individual who is a resident of a Contracting State, and who derives income from the performance of personal services in an independent capacity, will be exempt from tax by the other Contracting State in respect of that income. However, as provided in paragraph (2), the individual may be taxed in the other Contracting State if the services are performed in that other State, and if either he is present in that other State for a period or periods aggregating 183 days or more in the taxable year, or if he has a fixed base regularly available to him in that other State for the purpose of performing his services. In the latter case, only the income attributable to that fixed base may be taxed by that other Contracting State. If the individual is a citizen of the other Contracting State, that other State may tax his income without regard to this Article under the saving clause of paragraph (3) of Article 4 (General Rules of Taxation). 　　The term "fixed base" is understood to be analogous to the term "permanent establishment", as defined in Article 9 (Permanent Establishment). Independent personal services include all personal services performed by an individual for his own account, where he receives the income and bears the losses arising from such services. ARTICLE 18 Dependent Personal Services 　　This Article deals with the taxation of remuneration derived by a resident of a Contracting State as an employee. 　　Under paragraph (1), a remuneration derived by an individual who is a resident of a Contracting State as an employee, including remuneration for services performed by an officer of a corporation, may be taxed by that Contracting State Such remuneration derived from sources within the other Contracting State may also be taxed by the other Contracting State, with certain exceptions specified in paragraph (2). The source of such income is the Contracting State in which the services are performed (see paragraph (6) of Article 6 (Source of Income)). 　　Under paragraph (2), even where the remuneration described in paragraph (1) is derived from sources within the other Contracting State, that Contracting State may not tax the remuneration of an individual who is a resident of the other Contracting State if 　　(1) the individual is present in the first-mentioned Contracting State for a period or periods aggregating less that 183 days in the taxable year, 　　(2) the remuneration is paid by, or on behalf of, an employer who is not a resident of that　first-mentioned Contracting State, and 　　(3) the remuneration is not borne as a deductible expense by a permanent establishment, a　fixed base or a trade or business which the employer has in that first-mentioned Contracting State. 　　If any of these conditions is not met, the remuneration may be taxed by the first-mentioned Contracting State. 　　Paragraph (3) provides a special rule applicable to remuneration for services performed by an individual as an employee aboard ships or aircraft. Such remuneration for services performed aboard ships or aircraft operated by a resident of a Contracting State in international traffic is exempt from tax by the other Contracting State if the individual performing the services is a member of the regular complement of the ship or aircraft. 　　If an individual deriving income dealt with in this Article is a citizen of a Contracting State, that Contracting State may tax his employment income without regard to this Article under the saving clause in paragraph (3) of Article 4 (General Rules of Taxation). ARTICLE 19 Artistes And Athletes Paragraph (1) overrides the provisions of Article 17 (Independent Personal Services) and Article 18 (Dependent Personal Services) for the taxation of the income of entertainers and athletes to permit the source State to tax such income under certain circumstances where those other Articles would not permit taxation. Income derived by a resident of a Contracting State from his personal activities as an entertainer or athlete exercised in the other Contracting State may be taxed in the other Contracting State if the amount of the gross receipts derived by the individual, not including expenses reimbursed to him or borne on his behalf, is $500 or more per day of performance (including rehearsal time) or $5,000 or more for the taxable year concerned (or equivalent amounts in Cypriot pounds). If the gross receipts exceed $500 per day or $5,000 per year, the full amount, and not just 6he excess, may be taxed in the Contracting State in which the services are performed. If the individual receives a fixed total amount for performing his services on more than one day, the amount received will be prorated over the number of days the individual performs his services for purposes of applying the $500 per day test. 　　Income derived by producers, directors, technicians and others who are not performers or athletes is taxable in accordance with Article 17 or 18, as appropriate. 　　Paragraph (2) deals with the case where income for services performed by an artiste or athlete does not accrue to the performer, but to an other person. Under those circumstances, the income may be taxed in the Contracting State where the services are performed, without regard to the provisions of the Convention concerning business profits or income from independent or dependent personal services, unless it is established that neither the artiste or athlete, nor any related person, participates in that income in any manner whatsoever. 　　Foreign entertainers commonly perform services in the United States as employees of, or under contract with, a company or other person. That other person may act as the nominal recipient of the income in respect of the entertainer 5 services and the entertainer may act as its employee or contractor. In such a case, for example, in the absence of such a provision, a company providing the services of an entertainer may escape United States taxation in respect of the income for the entertainer's services under the provisions of Article 8 (Business Profits), because the company has no permanent establishment in the United States. The entertainer may also escape taxation in the United States by receiving only a small salary in the year the services are performed, and then either receiving payment in a later year when the income is subject to little or no United States tax, or liquidating the company after the services are performed. Under paragraph (2), such other person cannot claim the permanent establishment protection otherwise provided by Article 8. 　　For purposes of paragraph (2), income is considered to accrue to another person if that person has control over, or the right to receive, gross income derived in respect of the services of an artiste or athlete. This rule applies regardless of whether the other person is a "sham" or a conduit. Income will not, however, be deemed to accrue to the benefit of another person where it is established to the satisfaction of the competent authority of the Contracting State in which the services are performed that neither the artiste or athlete, nor related persons, participate directly or indirectly in profits of such other person in any manner, including the receipt of deferred compensation, bonuses, fees, dividends, partnership distributions or other distributions. 　　Depending on the facts in a particular case, a person may be considered to be related to an artiste or athlete if he is an employee or agent of the artiste or athlete or if he is regularly employed by the artiste or athlete in an advisory capacity, such as his attorney, accountant or investment advisor. Paragraph (2) does not affect the rule of paragraph (1), applicable to the artiste or athlete himself. 　　This Article is subject to the provisions of the saving clause of paragraph (3) of Article 4 (General Rules of Taxation). Thus, if an artiste or athlete is a citizen of a Contracting State, that Contracting State may tax his income regardless of the provisions of this Article. ARTICLE 20 Directors' Fees 　　This Article provides a special rule for the taxation of directors' fees. If a resident of a Contracting State derives income in his capacity as a member of the board of directors of a corporation of the other Contracting State which is in excess of a reasonable fixed amount payable to all directors of the corporation per day of attendance at directors' meetings in that other Contracting State, the other Contracting State may tax the excess without regard to the provisions of Articles 17 (Independent Personal Services) and 18 (Dependent Personal Services). This rule does not apply to any income which a director of a corporation may derive in his capacity as an officer or employee of the corporation. Fees paid to a director which are not in excess of a reasonable fixed amount remain subject to the provisions of Articles 17 and 18. This Article is subject to the provisions of the saving clause in paragraph (3) of Article 4 (General Rules of Taxation), so that a director of a corporation who is a citizen of a Contracting State may be taxed on his income by that Contracting State without regard to the provisions of this Article. ARTICLE 21 Students And Trainees 　　Paragraph (1) deals with an individual who is a resident of a Contracting State and becomes temporarily present in the other Contracting State primarily for the purpose of studying at a university or other recognized educational institution in that other Contracting State, securing training necessary to qualify for the practice of a profession or professional specialty, or studying or doing research as a recipient of a grant, allowance or award from a governmental, religious, charitable, scientific, literary or educational organization. Such an individual will be exempt from tax in the other Contracting State, with respect to the amounts described below, for a period not exceeding 5 taxable years from the date of his arrival in that other Contracting State, and for such additional period, beyond the 5 years, as is necessary to complete, as a full-time student, the requirements for a postgraduate or professional degree from a recognized educational institution. The exemption applies to any gifts which the individual receives from abroad for the purpose of his maintenance, education or training; to the grant,, allowance or award referred to above; and to any income which he may receive from personal services performed in that other Contracting State in an amount not in excess of $2,000 or its equivalent in Cypriot pounds for any taxable year. 　　Paragraph (2) deals with an individual who is a resident of a Contracting State and becomes temporarily present in the other Contracting State as an employee, or under contract with, a resident of the first-mentioned Contracting State primarily for the purpose either of acquiring technical, professional or business experience from a person who is not a resident of the first-mentioned Contracting State or who is not related to the resident of such first-mentioned State which has sent the individual for training, or of studying at a university or other recognized educational institution in that other Contracting State. Such an individual will be exempt from tax in that other Contracting State for a period not exceeding one year with respect to any income which he receives from the performance of personal services, in an aggregate amount not exceeding $7,500 or its equivalent in Cypriot pounds. 　　Paragraph (3) deals with an individual who is a resident of a Contracting State and who becomes temporarily present in the other Contracting State for a period not exceeding one year, as a participant in a program sponsored by the government of that other Contracting State, for the primary purpose of training, research or study. Such an individual will be exempt from tax in that other Contracting State with respect to his income from personal services performed in that other Contracting State in respect of such training, research or study, in an amount not in excess of $10,000 or its equivalent in Cypriot pounds. 　　The monetary limits to the earned income exemptions provided in this Article are in addition to, and not in lieu of, any exemptions, allowances or deductions provided by the Code. Thus, an unmarried resident of Cyprus who is studying in the United States and does not acquire United States residence status, and who qualifies for the $2,000 earned income exemption, would be allowed one personal exemption in addition to the $2,000 exemption. If an individual earns more than the monetary limit provided for in the applicable provision of this Article, or remains temporarily in the Contracting State which he is visiting as a student or trainee (under paragraphs 1 and 2) for a longer period than that specified in the applicable provision, he would not, by reason of having exceeded those limits, lose the benefit of the exemption provided by this Article. 　　The benefits provided by a Contracting State under this Article are not subject to the saving clause of paragraph (3) of Article 4 (General Rules of Taxation), if the individual claiming the benefits is neither a citizen of that Contracting State nor has acquired immigrant status there (i.e., in the United States, is a holder of a green card). If, however, the individual is a citizen of that Contracting State, or if he does have immigrant status there, the saving clause does apply, and that Contracting State may apply its tax without regard to this Article.