Cyprus: Signature Of Cyprus – USA Inter-Governmental Agreement Under The American Foreign Account Tax Compliance Act
On 2 December 2014 the Cyprus finance minister and the American ambassador to Cyprus formally signed the intergovernmental agreement (“IGA”) between Cyprus and the USA under the Foreign Account Tax Compliance Act (“FATCA”), an American tax measure enacted in 2010 with the purpose of implementing mechanisms designed to prevent and detect US tax evasion on income derived by US persons (citizens or residents) from sources outside the US and improve taxpayer compliance and create greater transparency by strengthening information reporting and compliance with respect to US accounts and assets held overseas.
Foreign financial institutions (“FFIs”) as defined in FATCA are required to report specified information annually to the American Internal Revenue Service (“IRS”) regarding direct and indirect US account holders. A US account holder is someone displaying one or more of the following characteristics:
US citizenship or lawful permanent resident (green card) status;
a US birthplace;
a US residence address or a US correspondence address (including a US PO box);
standing instructions to transfer funds to an account maintained in the United States, or directions regularly received from a US address;
an “in care of” address or a “hold mail” address that is the sole address with respect to the client; or
a power of attorney or signatory authority granted to a person with a US address
FFIs must also report annually to the IRS on any accountholders that are foreign entities in which a US person owns more than 10% of the shares of a corporation (in vote or value) or of a partnership or of a trust. For foreign investment vehicles, any percentage of ownership is reportable.
There are two principal forms of IGA, known as “Model 1” and “Model 2”. Under the Model 1 IGA institutions subject to FATCA report information to their own tax authorities for onward transmission to the US authorities. Under Model 2, institutions provide information direct to the American authorities. In common with other EU members, in 2013 Cyprus undertook to enter into a Model 1 IGA and prior to the signature of the formal agreement Cyprus was treated as having an agreement “in – effect” from 22 April 2014, enabling Cyprus-resident FFIs to register on the IRS FATCA website.
The penalties for non-compliance are significant. A 30% withholding tax may be imposed on transactions with overseas financial institutions and other entities that fall within the scope of FATCA unless the institution concerned has concluded an agreement with the IRS defining its reporting obligations, or the institution’s home country has concluded an IGA with the USA. In addition, failure to comply with FATCA may involve legal and reputational issues which could disrupt business relationships with other financial institutions which are FATCA compliant and lead to loss of business. The rules apply to all FFIs even if they do not have US clients.
The IGA, which is in English, will shortly be published in the Official Gazette and translated into Greek. The Inland Revenue Department, as the reporting authority under the IGA, will issue guidelines for the interpretation of the agreement in due course. In addition the Assessment and Collection of Taxes Law will be amended to include the collection and automatic exchange of information in line with FATCA.
