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 SIGNED AT NICOSIA ON MARCH 19, 1984 GENERAL EFFECTIVE DATE UNDER ARTICLE 30: 1 JANUARY 1986 INTRODUCTION 　　The technical explanation is an official guide to the Convention. It reflects policies behind particular Convention provisions, as well as understandings reached with respect to the interpretation and application of the Convention. TABLE OF ARTICLES Article 1-------------------------------Taxes Covered Article 2-------------------------------General Definitions Article 3-------------------------------Fiscal Residence Article 4-------------------------------General Rules of Taxation Article 5-------------------------------Relief from Double Taxation Article 6-------------------------------Source of Income Article 7-------------------------------Non-Discrimination Article 8-------------------------------Business Profits Article 9-------------------------------Permanent Establishment Article 10------------------------------Shipping and Air Transport Article 11------------------------------Related Persons Article 12------------------------------Dividends Article 13------------------------------Interest Article 14------------------------------Royalties Article 15------------------------------Income from Real Property Article 16------------------------------Gains Article 17------------------------------Independent Personal Services Article 18------------------------------Dependent Personal Services Article 19------------------------------Artistes and Athletes Article 20------------------------------Directors' Fees Article 21------------------------------Students and Trainees Article 22------------------------------Governmental Functions Article 23------------------------------Private Pensions and Annuities Article 24------------------------------Social Security Payments Article 25------------------------------Diplomatic and Consular Officers Article 26------------------------------Limitation on Benefits Article 27------------------------------Mutual Agreement Procedure Article 28------------------------------Exchange of Information Article 29------------------------------Assistance in Collection Article 30------------------------------Entry into Force Article 31------------------------------Termination ARTICLE 1 Taxes Covered 　　Paragraph (1) designates the existing taxes of the Contracting States which are the subject of the Convention. In the case of the United States, these are the Federal income taxes imposed by the Internal Revenue Code ("Code"), the excise taxes imposed with respect to private foundations and the excise tax paid on insurance premiums paid to foreign insurers, but only to the extent that the risks are not reinsured, directly or indirectly, with a person not entitled to relief from such tax. The Convention does not apply to the accumulated earnings tax, the personal holding company tax or the social security taxes. 　　In the case of Cyprus, the covered taxes are the Income Tax, the Capital Gains Tax and the Special Contribution. 　　Under paragraph (2), the Convention will apply to any taxes which are substantially similar to those specified in paragraph (1) which are imposed in addition to, or in place of, the existing taxes after March 19, 1984 (the date of signature of the Convention). Paragraph (3) provides that for purposes of Article 7 (Non-Discrimination) the Convention will apply to all taxes imposed at national, state or local levels of government by either Contracting State; and for purposes of Article 28 (Exchange of Information), the Convention will apply to taxes of every kind imposed by the national Government of either Contracting State. ARTICLE 2 General Definitions 　　Paragraph (1) defines certain basic terms used in the Convention. A number of important terms; however, are defined elsewhere in the Convention. For example, the terms resident of Cyprus" and "resident of the United States" are defined in Article 3 (Fiscal Residence); the term "permanent establishment" is defined in Article 9 (Permanent Establishment) and the terms "interest" and "royalties" are defined in Articles 13 (Interest) and 14 (Royalties), respectively. The terms "United States" and "Cyprus" are defined to include the continental shelf areas of the Contracting States with respect to exploration and exploitation of their natural resources. For the United States, the definition of the continental shelf is interpreted in accordance with section 638 of the Code and the regulations thereunder. The term "United States" does not include Puerto Rico, Guam, the Virgin Islands or any other United States possession. The term "Contracting State" means either the United States or Cyprus, according to the context, and the term "State" means any National State, whether or not a Contracting State. 　　The term "person" is defined to include an individual, a partnership, a corporation, an estate, a trust or any other body of persons. 　　The terms "United States corporation" or "corporation of the United States" and "Cypriot corporation" or "corporation of Cyprus" are defined. In the case of the United States, the terms mean a corporation which is created or organized under the laws of the United States, any state thereof or the District of Columbia, as well as any unincorporated entity which is treated as a United States corporation for United States tax purposes. In the case of Cyprus, the terms mean an entity which is treated as a body corporate for tax purposes under Cyprus law, which is resident in Cyprus for purposes of Cyprus tax. The term, however, excludes a United States corporation. Thus, a United States corporation which is managed and controlled in Cyprus would be treated as a United States corporation, and not as a Cypriot corporation, for purposes of the Convention. 　　The competent authority in the case of the United States is the Secretary of the Treasury or his delegate, and in the case of Cyprus, the Minister of Finance or his authorized representative. 　　"International traffic" is defined to mean any transport by ship or aircraft, except where such transport is solely between places in the Contracting State which is not the State of residence of the person deriving the income dealt with in Article 10 (Shipping and Air Transport). 　　Paragraph (6) of Article 4 (General Rules of Taxation) refers to a tax burden which is substantially less than the tax generally imposed. Article 2 defines "substantially less than" to mean less than 50 percent of. 　　Paragraph (2) provides that in the application of the Convention, any term used but not defined in the Convention, will, unless the context requires otherwise, have the meaning which it has under the law of the Contracting State whose tax is being applied. However, if the meaning of a term under the law of a Contracting State cannot readily be determined, or if there is a conflict in meaning under the laws of the two States, the competent authorities may establish a common meaning in order to prevent double taxation or further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under the laws of either Contracting State. ARTICLE 3 Fiscal Residence 　　This Article sets forth rules for determining whether an individual, a corporation or any other person is a resident of a Contracting State for purposes of the Convention. A definition of residence is important because, for the most part, only residents of the Contracting States may claim the benefits of the Convention. The Convention definition of residence is to be used exclusively for purposes of the Convention. 　　Paragraph (1) defines the terms "resident of Cyprus" and "resident of the United States". A resident of the United States or Cyprus, as the case may be, includes a corporation of that State, and any person, except a corporation, resident in that State for purposes of its tax. A resident of the United States also includes a U.S. citizen, wherever resident. Since a Cyprus corporation is defined in Article 2 (General Definitions) to exclude a United States corporation, a corporation which is managed and controlled in Cyprus, thus making it a resident of Cyprus under Cyprus law, would not be a resident of Cyprus under the Convention if it is a United States corporation (i.e., a corporation which is created or organized under the laws of the United States, any state thereof or the District of Columbia). The possibility of a dual-resident corporation is thereby precluded. 　　Furthermore, a partnership, estate or trust will be treated as a resident of a Contracting State under the Convention only to the extent that the income derived by such person is subject to tax in that State as the income of a resident, either in the hands of the person deriving the income or in the hands of its partners or beneficiaries. This rule regarding the residence of partnerships, estates or trusts is applied to determine both whether that person is entitled to treaty benefits with respect to income which it receives and, where relevant, whether a resident of the other Contracting State is entitled to treaty benefits with respect to income paid by such person. If, under the laws of the two Contracting States, and, thus, under paragraph (1), an individual is deemed to be a resident of both the United States and Cyprus, a series of tie-breaker rules are provided in paragraph (2) to determine a single State of residence of that individual. 　　Paragraph (3) provides that such a determination will apply for all purposes of the Convention. 　　The first test is where the individual has a permanent home. If that test is inconclusive because the individual has a permanent home in both States or in neither, he will be considered to be a resident of the Contracting State where his personal and economic relations are closest. If that test is also inconclusive, he will be considered to be a resident of the Contracting State where he maintains a habitual abode. If he has a habitual abode in both States or in neither, he will be treated as a resident of the Contracting State of which he is a citizen. If he is a citizen of both States or of neither, the question is left to the competent authorities, who will attempt to settle it by mutual agreement. 　　If, by reason of paragraph (1), a person other than an individual or a corporation is a resident of both Contracting States, paragraph (4) provides that the competent authorities will attempt to reach agreement on a single State of residence and on the application of the Convention to such person. ARTICLE 4 General Rules of Taxation 　　Paragraph (1) contains the general rule that a resident of one Contracting State may be taxed by the other Contracting State on any income from sources within that other State, and only on such income. The tax imposed by the source State is subject to any limitations in the Convention, such as limits on the rate of tax which may be imposed by the State of source on dividends, interest and royalties. The source of any item of income for this purpose is determined in accordance with the source rules of Article 6 (Source of Income). This rule is subject to certain exceptions, one of which is found in paragraph (3) of this Article, which relates to a resident of one State who is a citizen of the other. 　　Paragraph (2) states the customary rule that no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other allowance accorded by the tax laws of the Contracting States. Thus, for example, if a deduction would be allowed under the Code in computing the taxable income of a Cypriot resident, such deduction will generally be available to that person in computing income under the Convention. A taxpayer may not, however, make inconsistent choices between the rules of the Code and the Convention rules. In no event may the Convention increase the overall tax burden on residents of the Contracting States. Thus, a right to tax given by the Convention cannot be exercised by the United States unless that right also exists under the Code. 　　Similarly, any benefit extended by any other agreement between the Contracting States cannot be denied as a result of any provision of this Convention. 　　Paragraph (3) contains the traditional saving clause under which both Contracting States reserve the right to tax their citizens and residents as if the Convention had not come into effect. 　　Residence for this purpose is determined under Article 3 (Fiscal Residence) of the Convention. A citizen is defined for purposes of this rule to include a former citizen of a Contracting State whose loss of citizenship had as one of its principal purposes the avoidance of the tax of the State of former citizenship. This rule applies only for a period of ten years following the loss of citizenship. A former United States citizen will be taxable under this rule in accordance with section 877 of the Code. 　　Paragraph (4) sets forth certain exceptions to the saving clause in cases where its application would contravene policies reflected in the Convention which are specifically intended to afford benefits granted by a State to its citizens and residents. Thus, the benefits conferred by a Contracting State under Article 5 (Relief from Double Taxation), 7 (Non-Discrimination), 24 (Social Security Payments) and 27 (Mutual Agreement Procedure) will not be affected by the saving clause. Under a second category of exceptions, the benefits of Articles 21 (Students and Trainees) and 22 (Governmental Functions) will not be denied to a resident of a Contracting State if the individual is neither a citizen of that State nor has immigrant status there. The term "immigrant status" for United States purposes refers to a person admitted to the United States as 　　a permanent resident under United States immigration laws (i.e., the holder of a "green card"). 　　Paragraph (5) deals with the situation, applicable in certain circumstances under Cyprus law, where a resident of a Contracting State is subject to tax in that State on income derived from abroad only to the extent that the income is remitted to or received in that State. This paragraph provides that when such a remittance basis rule applies, exemptions or reductions in tax in the other State under the Convention will apply to an item of income only to the extent that the income is remitted to or received in the State of residence of the recipient during the calendar year such income is paid or the next succeeding calendar year. Paragraph (6) contains a rule designed to prevent certain types of abuse of the Convention. The paragraph provides that reductions in tax or exemptions in one Contracting State provided for in the Convention will not apply if the recipient of the income from that State who is a resident of the other State is subject in his State of residence on that income to a rate of tax or tax burden which is substantially less than the tax which would generally be imposed by that State of residence on such income if it was derived from sources within that State. Under Article 2 (General Definitions), a rate of tax or tax burden which is less than 50 percent of the rate normally applicable will be considered to be substantially less than the tax normally imposed. Thus, for example, if a corporation which is a resident of Cyprus derives dividend income from the United States, which, under Article 12 (Dividends), is subject to a maximum rate of tax in the United States of 15 percent, and if that corporation is subject to income tax in Cyprus with respect to that dividend income at a rate of 4.25 percent instead of the normal corporate income tax rate of 42.5 percent, then United States tax will be imposed on the dividend income at the statutory rate of 30 percent rather than the treaty rate of 15 percent. This rule will be applied on an item of income by item of income basis. This denial of benefits rule does not apply to pension income dealt with in paragraph (1) of Article 23 (Private Pensions and Annuities). Thus, the source country exemption for pension income provided in that paragraph will continue to apply whether or not the recipient of the pension is subject to tax at normal rates in his country of residence. (See the explanation of Article 26 (Limitation on Benefits) for an additional discussion of this paragraph and its relation to Article 26.) ARTICLE 5 Relief From Double Taxation In order to avoid double taxation, each Contracting State agrees in this Article to provide to its citizens or residents a credit against its taxes for the taxes paid by such person to the other Contracting State. 　　In paragraph (1), the United States agrees to allow to a citizen or resident of the United States as a credit against United States tax the appropriate amount of taxes paid or accrued to Cyprus, in accordance with the provisions and subject to the limitations of United States law (as it may be amended from time to time without changing the general principle of paragraph (1)). 　　Under Article 12 (Dividends), no Cypriot tax may be imposed on dividends paid to a resident of the United States in excess of the tax paid at the corporate level on the income out of which the dividend is paid. Therefore, no United States credit is allowed with respect to a dividend paid by a Cypriot corporation, except when the recipient is a United States corporation which owns at least ten percent of the voting power of the Cypriot corporation paying the dividend. In the latter case, the United States will allow a credit for the appropriate amount of Cypriot tax paid by the Cypriot corporation with respect to the income out of which the dividend is paid. Any credit allowed under this paragraph is based on the Cypriot tax paid, but is subject to the limitations in United States law, which limit the credit to the amount of United States taxes paid on income from sources outside the United States (see, for example, code section 904(g)). This provision does not require the United States to maintain a per-country or overall limitation, so long as the general principle of a foreign tax credit remains in effect. For purposes of applying this paragraph, the rules in Article 6 (Source of Income) will be used to determine the source of income. 　　Under paragraph (2), Cyprus agrees to provide to its citizens or residents a credit against Cypriot tax for the appropriate amount of United States taxes paid, in accordance with the provisions and subject to the limitations of Cyprus law (as it may be amended from time to time without changing the general principle of paragraph (2)). In the case of a Cypriot corporation which receives dividends from a United States corporation in which the Cypriot corporation owns at least 10 percent of the voting power, the credit will include the appropriate amount of United States tax paid by the corporation paying the dividends with respect to the income out of which the dividends are paid. The credit will be based on the amount of United States tax paid, but will not exceed the portion of the Cypriot tax (computed before the allowance of the credit) applicable to the items of income from United States sources. For purposes of applying this paragraph, the rules of Article 6 (Source of Income) will be used to determine the source of income. 　　This Article is not subject to the saving clause of paragraph (3) of Article 4 (General Rules of Taxation). Thus, each Contracting State will allow a credit to its citizens and residents in accordance with the provisions of this Article, even if those provisions provide a benefit not available under the internal law of the Contracting State granting the credit.