Favourable IRS ruling for US taxpayer on application of US-Cyprus tax treaty

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By Eric D Ryan and Anil John Kalia

In a recent internal legal memorandum (ILM), the IRS concluded that a US individual was entitled to treat dividends received from a Cypriot holding company with no Cypriot ownership as qualified dividend income (QDI) and is thereby eligible for reduced US income tax rates.

Cyprus, a member of the European Union, is generally regarded as a favourable finance and holding company location, due to its relatively low income tax regime and favourable withholding tax network.

The US-Cyprus income tax treaty contains a relatively unusual Limitation on Benefits (LOB) provision, under which a Cypriot corporation is not eligible for the benefits of the treaty unless more than 75 per cent of the number of shares of each class of the corporation’s shares is owned, directly or indirectly, by one or more individual residents of Cyprus, and certain other requirements are met (LOB Provision 1). However, the US-Cyprus Treaty also provides that LOB Provision 1 does not apply to a Cypriot corporation if the establishment, acquisition and maintenance of the Cypriot corporation and the conduct of its operations does not have as a principal purpose obtaining benefits under the treaty (LOB Provision 2).

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