Exchange of Notes (1984)

Exchange of Note

In notes exchanged when the proposed treaty was signed, the countries confirmed their agreement under Article 28 of the proposed treaty (Exchange of Information) to exchange such information as is pertinent to carrying out the provisions of the treaty and the provisions of the domestic laws of the two countries concerning taxes covered by the treaty. The countries acknowledged that the United States presently has full authority under its internal law to implement their agreement. The countries agreed that, with respect to Cyprus, the treaty would provide the necessary authority to implement the treaty to the extent that authority appears to be lacking under the internal law of Cyprus in the absence of the treaty. The notes specify that, among the types of information that the treaty will empower Cyprus to provide, are included: bank information in the custody of a taxpayer; information in the custody of a bank; information in the possession of the Central Bank relating to beneficial stock ownership; information in the possession of the registered legal owner of a corporation relating to beneficial stock ownership; and information in the possession of a trustee relating to beneficial ownership. The notes also confirm the understanding of the countries that civil and criminal sanctions can be imposed under Cypriot law in the event that a person from whom information is requested does not disclose the information. This portion of the notes is discussed in greater detail under Article 28 above.

In the notes, the United States also offered Cyprus assurances that, when circumstances permitted, the United States would be prepared to resume discussions with a view to incorporating provisions in the treaty, consistent with U.S. income tax policies regarding other developing countries, that would minimize the interference of the U.S. tax system with investment incentives offered by the Government of Cyprus.

These assurances reflect the desire of Cyprus and other developing countries to have the United States adopt a tax sparing credit. These assurances are similar to assurances provided in certain other U.S. income tax treaties with developing countries.

Many developed countries provide a tax sparing credit in order to avoid what, in the view of some, is a conflict with the foreign investment incentive policies of developing countries. A tax sparing credit is an income tax credit provided by a country (typically a developed country) against its own tax on income from a developing country. The credit equals the full amount of the developing country’s nominal tax on the income notwithstanding the developing country’s reduction or elimination of the tax as part of an investment incentive program. Many developing countries (including Cyprus), for example, provide “tax holidays” to residents of other countries who invest in the developing country. Generally, under these tax holidays, the developing countries forego tax on the profits from the foreign­owned business for a period of time. Absent a tax sparing credit, however, those profits typically would be taxed in full by the country of residence of the business’ foreign owner upon repatriation in dividend form. The United States has declined to give tax sparing credits.