Technical Explanation PDF

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.
ARTICLE 6
Source of Income
This Article contains the source rules which are used in applying the rules of the
Convention. For example, under Article 4 (General Rules of Taxation), one Contracting State
may tax a resident of the other Contracting State only on income from sources within the first-
mentioned Contracting State (provided, with certain exceptions, such resident is not a citizen of
the first-mentioned State).
Paragraph (1) provides, as a general rule, that dividends will be treated as income from
sources within a Contracting State only if paid by a corporation of that State. An exception to this
general rule provides that a dividend will be deemed to be from United States sources if paid by a
corporation other than a United States corporation (including a Cypriot corporation) which
derives 50 percent or more of its total gross income from one or more permanent establishments
which that corporation has in the United States. This rule is similar to that in Code section
861(a)(2)(B). It differs from the Code rule, however, in several respects. For example, it deals
with income derived from a permanent establishment rather than a trade or business, and it does
not specifically provide that only a pro rata portion of the dividend will be treated as income
from sources within the United States. However, since Article 4 (General Rules of Taxation)
provide, in effect, that the Convention cannot operate to increase a person's United States tax, the

proration specified in the Code will be applied to determine the portion of the dividend paid by
such non-United States corporation which will be treated as United States source income. In the
case of a dividend which would be treated under the general rule as being from Cypriot sources
(i.e., paid by a Cypriot corporation), but which, under the exception, would be treated as being
from United States sources, the portion of the total dividend, after proration, to which the
exception applies would be treated as United States source income, and any excess would be
treated as Cypriot source income.
Paragraph (2) provides, as a general rule, that interest will be treated as income from
sources within a Contracting State only if the interest is paid by the Contracting State itself, a
political subdivision or local authority of that State or by a resident of that State. An exception to
this general rule provides that if the person paying the interest (whether or not that person is a
resident of a Contracting State) has a permanent establishment in a Contracting State, and the
indebtedness on which the interest is paid was incurred in connection with that permanent
establishment and the interest is borne by the permanent establishment (i.e., the interest is
deducted in computing the income of the permanent establishment), then the interest will be
deemed to be from sources in the Contracting State in which the permanent establishment is
situated. Similarly, if a resident of a Contracting State has a permanent establishment in a State
other than a Contracting State, then interest paid on indebtedness incurred in connection with that
permanent establishment, which is borne by the permanent establishment, will be deemed to be
from sources in the State in which the permanent establishment is situated.
A further exception provides that interest will be deemed to be from sources within the
United States if paid by a Cypriot corporation which derives 50 percent or more of its total gross
income from one or more permanent establishments which that Cypriot corporation has in the
United States. This is similar to the rule in Code section 861(a)(l)(C) and (D). It differs from the
Code rule, for example, in that the rule in the Convention does not provide for proration. As in
the case of dividends, however, the ability of the United States to exercise its taxing rights under
this provision is limited by its right to impose tax under the Code. Thus, the Code proration rules
will apply.
Under paragraph (3), royalties, as defined in paragraph (2) of Article 14 (Royalties), are
treated as income from sources within a Contracting State only to the extent that they are for the
use of or the right to use in that Contracting State the property or rights giving rise to the
royalties.
Paragraph (4) provides that income from real property, as described in Article 15 (Income
from Real Property), has its source in the Contracting State in which the real property is situated.
Under paragraph (5), income from the rental of tangible personal property has its source
in a Contracting State only if the property is used in that Contracting State, or is held for use
there.
Paragraph (6) provides the rule for the source of income from the performance of
personal services. The general rule is that income received by an individual for the performance

of labor or personal services, either as an employee or in an independent capacity, will be treated
as income from sources in a Contracting State only to the extent that the services are performed
in that State. Income from labor or personal services includes pensions (as defined in paragraph
(3) of Article 23 (Private Pensions and Annuities)) paid in respect of such services.
There are several exceptions to the general rule, under which income from personal
services may be sourced in a Contracting State other than the State where the services are
performed: Income from personal services performed aboard ships or aircraft operated by a
resident of a Contracting State in international traffic will be treated as income from sources only
within that Contracting State if the services are rendered by a member of the regular complement
of the ship or aircraft. Remuneration described in Article 22 (Governmental Functions) and
payments described in Article 24 (Social Security Payments) are treated as income from sources
within a Contracting State only if paid by or from the public funds of that State or a political
subdivision or local authority of that State. In addition, Article 20 (Directors' Fees) provides that
a portion of directors' fees paid by a corporation of a Contracting State may be taxed in that State;
this paragraph treats that portion of the fees as income from sources within that State.
Paragraph (7) provides that income from the purchase and sale of property (including
tangible and intangible personal property and real property) will be treated as income from
sources in a Contracting State if either
(1) the property is sold in that Contracting State, or
(2) the property is of the type described in Paragraph (l)(a) or (b) of Article 16 (Gains)
and the property is located or deemed to be located (under paragraph (3) of Article 16) in
that Contracting State.
Thus, for example, if the property is shares in a United States corporation which is a United
States real property holding corporation (i.e., a "United States real property interest"), the income
from the sale of those shares will be income from sources in the United States even if the sale
takes place outside the United States.
The source of gains described in paragraph (2)(b) of Article 14 (Royalties) will be
determined under paragraph (3) of this Article, not under this paragraph.
Paragraph (8) contains a general qualification to the preceding source rules. It provides
that industrial and commercial profits attributable to a permanent establishment which the
recipient, a resident of a Contracting State, has in the other Contracting State will be treated as
income from sources within that other Contracting State. Industrial and commercial profits
attributable to such permanent establishment may include any items of income described in the
preceding paragraphs of this Article (except paragraph (6)) if the item of income is effectively
connected with the permanent establishment. (See the explanation of paragraph (6)(b) of Article
8 (Business Profits) for a discussion of the "effectively connected" concept.)
Under paragraph (9), the source of any item of income not described in the preceding
paragraphs of this Article will be determined by each Contracting State in accordance with its
own law. If the source rules of the Contracting States with regard to a particular item of income

differ, or if the source of an item of income is not readily determinable under the laws of a
Contracting State, the competent authorities may establish a common source of that item of
income for purposes of the Convention in order to prevent double taxation or further any other
purpose of the Convention.
Several of the source rules set out in this Article may differ in some degree from those in
the Code. Since as noted previously, paragraph 2 of Article 4 (General Rules of Taxation)
provides, in effect, that the Convention will not increase a person's overall United States tax, a
taxpayer is not required to apply the Convention rules in calculating his United States tax liability
if the Code rules provide a more favorable result. A taxpayer may not, however, make
inconsistent choices between Code and Convention rules.
ARTICLE 7
Non-Discrimination
Paragraph (1) provides that a citizen of one Contracting State shall not be subject to more
burdensome taxes in the other Contracting State than a citizen or that other Contracting State
who is in similar circumstances. This paragraph would not apply in the case of a citizen of
Cyprus who is not resident in the United States and a citizen of the United States who is not
resident in the United States, to require that the Cyprus citizen not be subject to more
burdensome United States taxation than the citizen of the United States. The citizen of the United
States is subject to United States taxation on worldwide income, while the citizen of Cyprus is
not, thus making their circumstances different. However, a citizen of Cyprus who is resident in
the United States, and who otherwise meets the requirements of Code section 911, would, under
this paragraph, be entitled to the benefits of section 911, even though not a citizen of the United
States.
Paragraph (2) provides that a Contracting State may not impose more burdensome taxes
on a permanent establishment of a resident of the other Contracting State than it imposes on its
own residents carrying on similar activities. This provision, however, does not obligate a
Contracting State to grant to individual residents of the other Contracting State any personal
allowances, etc., on account of civil status or family responsibility, which it grants to its own
individual residents.
Paragraph (3) prohibits discrimination in the allowance of deductions. Except where the
provisions of paragraph (1) of Article 11 (Related Persons), paragraph (5) of Article 13 (Interest)
and paragraph (4) of Article 14 (Royalties) apply (all of which permit denial of deductions in
certain circumstances in transactions between related persons), interest, royalties and other
disbursements paid by a resident of one Contracting State to a resident of the other shall be
deductible in the first-mentioned Contracting State under the same conditions as if they had been
paid to a resident of that first-mentioned Contracting State. The term "other disbursements" is
defined to include a reasonable allocation of executive and general administrative expenses
(other than expenses which constitute "stewardship" expenses undertaken for the benefit of the
investor), research and development expenses and other expenses incurred for the benefit of a

group of related persons which includes the person incurring the expense. This paragraph also
requires that a debt of a resident of one Contracting State owed to a resident of the other be
deductible for purposes of any capital taxation in the first-mentioned Contracting State under the
same conditions as if the debt were owed to a resident of the first-mentioned State. Though the
Convention does not generally cover capital taxes, under paragraph (3) of Article 1 (Taxes
Covered), the non-discrimination provisions apply to taxes of all kinds, imposed at all levels of
government in both Contracting States.
Paragraph (4) requires that a Contracting State not impose other or more burdensome
taxation (including connected requirements) on a corporation of that State which is owned or
controlled, directly or indirectly, by residents of the other Contracting State than it imposes on
other similar corporations of that Contracting State. Thus, a Cypriot subsidiary of a United States
corporation must not be subject to more burdensome taxation in Cyprus than a Cypriot
corporation owned by residents of Cyprus.
This Article is not subject to the saving clause of paragraph (3) of Article 4 (General
Rules of Taxation). Thus, a resident of a Contracting State who is a citizen of the other
Contracting State may claim the benefits of this Article in that other Contracting State.
ARTICLE 8
Business Profits
This Article provides rules for the taxation by a Contracting State of income from
business activity carried on by a resident of the other Contracting State.
Paragraph (1) sets forth the general rule that industrial or commercial profits (as defined
in paragraph (6)(a)) of a resident of one Contracting State are exempt from tax in the other
Contracting State unless that resident is engaged in industrial and commercial activity (as defined
in paragraph (5)) through a permanent establishment in that other Contracting State. Permanent
establishment is defined in Article 9 (Permanent Establishment). Where there is a permanent
establishment, only the industrial and commercial profits attributable to the permanent
establishment may be taxed.
The saving clause of paragraph (3) of Article 4 (General Rules of Taxation) applies to this
Article, so that if, for example, a citizen of the United States who is a resident of Cyprus derives
industrial and commercial profits from the United States, the United States may tax those profits
even if the individual has no permanent establishment in the United States.
Under paragraph (8) of Article 6 (Source of Income), industrial or commercial profits
which are attributable to a permanent establishment which a resident of one Contracting State has
in the other Contracting State will be considered to be from sources within that other State.
Under this rule, items of income described in Code section 864(c)(4)(B) attributable to a
permanent establishment situated in the United States will be subject to tax by the United States.

In determining the proper attribution of industrial or commercial profits to a permanent
establishment under the Convention, paragraph (2) provides that both Contracting States will
attribute to a permanent establishment the profits which the establishment would have earned had
it been an independent entity engaged in the same or similar activities under the same or similar
conditions.
Under paragraph (3), expenses which are reasonably connected with the profits of a
permanent establishment, including executive and general administrative expenses, wherever
incurred, will be allowed as deductions in determining the industrial or commercial profits of the
permanent establishment.
Paragraph (4) provides that a Contracting State will not attribute profits to a permanent
establishment of a resident of the other Contracting State merely because of the purchase of
goods or merchandise by that permanent establishment, or by that resident for its own account.
Paragraph (2) does not override paragraph (4), so that where a permanent establishment
purchases goods for its home office, the industrial and commercial profits will not include any
notional figure representing profits from purchasing activities.
Paragraph (5) defines the term "industrial and commercial activity". The term includes the
conduct of manufacturing, mercantile, banking, insurance, agricultural, fishing or mining
activities, the operation of ships or aircraft, the furnishing of services and the rental of tangible
personal property. The term does not include the performance of personal services by an
individual, which is dealt with in Articles 17 and 25. The term "industrial and commercial
profits" is defined in paragraph (6)(a) to mean income derived from industrial and commercial
activity. The term also includes income from real property, dividends, interest, royalties and
gains, but only if the property or rights giving rise to that income is effectively connected with a
permanent establishment in a Contracting State. Such income need not be derived from industrial
or commercial activity, but unless the recipient is engaged in industrial and commercial activity,
under paragraph (1), the Contracting State in which the permanent establishment is situated may
not tax that income under this Article.
Paragraph (6)(b) provides criteria for determining when property or rights are effectively
connected with a permanent establishment. The factors to be taken into account include whether
rights or property are used or held for use in carrying on industrial or commercial activities
through the permanent establishment and whether those activities were a material factor in the
realization of the income derived from the property or rights. In making such a determination,
due regard is to be given to whether or not the property, rights or income were accounted for
through the permanent establishment. The concept of effective connection as used in this
Convention is narrower that the concept in Code section 864(c)(3), which includes a limited
"force of attraction" rule not present in the Convention.
Under paragraph (7), where industrial or commercial profits include items of income
which are dealt with separately in other articles of the Convention, the provisions of those
articles, except where they specifically provide to the contrary, will take precedence over the
provisions of this Article. Thus, for example, the taxation of interest will be determined under

Article 13 (Interest) and not under this Article, except when, as provided in paragraph (4) of
Article 13, the indebtedness giving rise to the interest is effectively connected with a permanent
establishment.
ARTICLE 9
Permanent Establishment
This Article defines the term "permanent establishment". The existence of a permanent
establishment is relevant under Article S (Business Profits) to the taxation of industrial or
commercial profits and in determining the applicability of other provisions of the Convention.
Under paragraph (1), the term "permanent establishment" means a fixed place of business
through which a resident of a Contracting State engages in industrial or commercial activity.
Paragraph (2) gives an illustrative, non-exclusive, list of fixed places of business which will
constitute a permanent establishment. This list includes a branch, an office, a factory, a
workshop, a warehouse, and a store or other sales outlet.
The list also includes a mine, quarry or other place of extraction of natural resources, and
a building site or construction or installation project or an installation or drilling rig or ship used
to explore for natural resources, but only if that site, etc., exists or lasts for more than six months.
Under this rule, the six month period begins only when work physically commences in the other
Contracting State; A series of con tracts or projects which are interdependent both commercially
and geographically is to be treated as a single project for purposes of applying the
six month test. If the six month test is exceeded, the site or project constitutes a permanent
establishment from its first day.
Paragraph (3) lists a number of exceptions to the general rule that a fixed place of
business through which industrial or commercial activity is carried on will constitute a permanent
establishment. The activities listed in the paragraph are considered to be preparatory or auxiliary
to industrial or commercial activity. The exceptions are cumulative, and a fixed place of business
used only for one or more of the listed activities will not constitute a permanent establishment.
Paragraphs (4) and (5) deal with the use of agents. Under paragraph (4), a dependent
agent of a resident of a Contracting State in the other Contracting State will be deemed to be a
permanent establishment of that resident if the agent has and habitually exercises an authority to
conclude contracts in the name of that resident, unless his activities are limited to those specified
in paragraph (3), which would not constitute a permanent establishment if exercised through a
fixed place of business. Under paragraph (5), a resident of a Contracting State will not be deemed
to have a permanent establishment in the other Contracting State merely because it engages in
industrial or commercial activity in that other Contracting State through an independent agent
who is acting in the ordinary course of his business.
Paragraph (6) provides that, in determining whether a resident of a Contracting State has
a permanent establishment in the other Contracting State, no account shall be taken of the fact

that the first-mentioned resident may be related (within the meaning of Article II (Related
Persons)) to a resident of the other Contracting State, or to any person who engages in industrial
or commercial activity in that other Contracting State, whether or not through a permanent
establishment.
Under paragraph (7), for purposes of the Convention, the provisions of this Article also
apply in determining whether any person has a permanent establishment in any State. Thus, the
principles of Article 9 would be used, in applying the Convention, to determine whether a
resident of a third State has a permanent establishment in the United States or Cyprus, and
whether a resident of the United States or Cyprus has a permanent establishment in a third State.
ARTICLE 10
Shipping And Air Transport
Paragraph (1) provides that, notwithstanding Article 8 (Business Profits) and Article 16
(Gains), income derived by a resident of a Contracting State from the operation in international
traffic of ships or aircraft shall be exempt from tax in the other Contracting State. The exemption
also covers gains from the sale, exchange or other disposition of such ships or aircraft. The term
"international traffic" is defined in paragraph (1)(h) of Article 2 (General Definitions).
Under paragraph (2), profits derived from the rental on a full or bareboat basis of ships or
aircraft which are operated in international traffic by the lessee, or which rental profits are
incidental to profits, described in paragraph (1), from the operation in international traffic of
ships or aircraft, are included within profits from the operation of ships or aircraft in international
traffic. Such profits, therefore, derived by a resident of one Contracting State are exempt from tax
in the other Contracting State. Thus, if a resident of the United States leases an aircraft to a
resident of Cyprus, the lease payments will be exempt from Cyprus tax if either the aircraft is
used in international traffic by the resident of Cyprus, or if the United States lessor is engaged in
the operation of aircraft in international traffic, and the rental profits are incidental to such
operation, regardless of whether the aircraft is used internationally or domestically by the lessee.
Paragraph (3) provides that the State from the use, maintenance or profits of a resident of
a Contracting rental of containers (including equipment for their transport) which are used for the
transport of goods or merchandise in international traffic will be exempt from tax in the other
Contracting State.
This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation). Therefore, a Contracting State may tax the income of a resident of the other
Contracting State without regard to this Article, if such resident is a citizen of the first-mentioned
Contracting State.
ARTICLE 11
Related Persons

This Article complements section 482 of the Code. It provides that where related persons
engage in transactions that are not at arm’s length, the Contracting States may make appropriate
adjustments to the taxable income and tax liability of such related persons.
Under paragraph (1), where a person subject to the taxing jurisdiction of a Contracting
State and any other person are related, and where those related persons make arrangements or
impose conditions between themselves which are different from those that would be made
between independent persons, then the Contracting States may, in computing the income (or loss)
of such person, take into account any income, deductions, credits, etc., which would have been
taken into account in the absence of such a relationship.
Paragraph (2) defines the concept of relate4 persons. Under this paragraph, a person is
related to another person if either owns or controls the other, directly or indirectly, or if any third
person or persons own or control both, directly or indirectly. The term ''control" includes any
kind of control, whether or not legally enforceable and however exercised or exercisable.
Paragraph (3) provides that where a Contracting State has made an adjustment under
paragraph (1), and the other Contracting State agrees that the adjustment was appropriate under
that paragraph, that other Contracting State is obligated to make a corresponding adjustment to
the income, loss or tax of the related person in that other Contracting State.
ARTICLE 12
Dividends
Paragraph (1) provides that dividends derived from sources within Cyprus and
beneficially owned by a resident of the United States will not be subject to any tax in Cyprus in
excess of the tax imposed on the profits or earnings out of which the dividends are paid. This rule
reflects the imputation system under which Cyprus taxes its corporations and their shareholders.
Under Cyprus law, when a Cypriot corporation pays a dividend, there is no tax imposed in
Cyprus on the dividend itself. The shareholder includes the dividend in income for Cyprus
income tax purposes, grossed-up by the amount of Cypriot corporate tax paid on the income out
of which the dividend is paid. The shareholder is then granted a refundable credit for the amount
of the gross-up. Under the Convention, a United States individual resident shareholder may
compute Cyprus tax on his dividend income and, if the corporate tax paid exceeds his liability for
Cyprus tax on his dividend, he may apply to the Cyprus authorities for a refund. In no case will
any United States shareholder be liable to any additional tax on Cyprus on his Cypriot source
dividends.
Paragraph (2) provides the rules for determining United States tax on dividends paid to
residents of Cyprus. The general rate of United States tax on dividends derived from sources
within the United States and beneficially owned by a resident of Cyprus is limited to 15 percent
of the gross dividend. The rate is limited to 5 percent if (1) at least 10 percent of the outstanding
voting stock of the United States corporation was owned by the Cyprus corporation during the

portion of the taxable year of the United States corporation prior to the payment of the dividend
and all of the preceding taxable year, and (2) not more than 25 percent of the gross income of the
United States corporation for the prior taxable year (if any) consists of certain passive income.
Paragraph (3) provides that the limitations on source country tax in paragraphs (1) and (2)
do not apply if the beneficial owner of a dividend who is a resident of a Contracting State has a
permanent establishment in the other Contracting State, and the dividend is paid with respect to
shares which are effectively connected with the permanent establishment. In that case the
taxation of the dividend income is determined under Article 8 (Business Profits) and not under
this Article.
Paragraph (4) provides, in general, that a Contracting State may not tax the dividends
paid by a corporation of the other Contracting State. However, such dividends may be taxed by
that other Contracting State if the recipient has a permanent establishment in that other
Contracting State, and the shares in respect of which the dividends are paid are effectively
connected with such permanent establishment. In addition, if dividends are paid by a corporation
of Cyprus which derives 50 percent or more of its total gross income from one or more
permanent establishments which that corporation has in the United States, the United States may
tax those dividends, and the limitations of paragraph (2) do not apply.
This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation). Thus, the United States may tax a dividend received by a resident of Cyprus without
regard to the limitations of this Article if that Cyprus resident is a citizen of the United States.
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 first-
mentioned 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 first-
mentioned 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.
ARTICLE 22
Governmental Functions
This Article provides that wages, salaries and similar remuneration, including pensions,
annuities and similar benefits, paid to a citizen of a Contracting State out of: the public funds of
that Contracting State will be exempt from tax by the other Contracting State if the payment is
for services rendered by the citizen as an employee of the first-mentioned Contracting State in the
discharge of governmental functions.
Payments to employees of a Contracting State who are not citizens of that Contracting
State, and payments for services which are not in the discharge of governmental functions are, as
appropriate, dealt with in the other Articles of the Convention dealing with the taxation of
income from personal services. For example, a resident of the United States who is not a United
States citizen and who is employed in the United States Embassy in Nicosia, will be subject to
the provisions of Article 18 (Dependent Personal Services) in the determination of his tax
liability, if any, to Cyprus. The taxation of his pension by Cyprus in respect of his United States
Government service will be determined under the provisions of Article 23 (Private Pensions and
Annuities).

The provisions of this Article are not subject to the saving clause of paragraph (3) of
Article 4 (General Rules of Taxation) in respect of an individual who is neither a citizen nor a
resident with immigrant status in the Contracting State in which the services are performed. In
other cases the saving clause does apply. Thus, if a citizen of Cyprus is employed in the Cypriot
Embassy in Washington, and that individual is also a citizen of the United States or has
immigrant status in the United States (i.e., he holds a green card), the United States may tax the
salary of that individual without regard to this Article. If, however, he is neither a citizen of the
United States, nor has immigrant status there, the provisions of this Article will be applicable.
ARTICLE 23
Private Pensions And Annuities
Paragraph (1) provides that pensions and other similar remuneration (other than such
payments dealt with in Article 22 (Governmental Functions)) paid to an individual who is a
resident of a Contracting State in consideration of past employment are
taxable only in that Contracting State. The term "pensions and annuities" is defined to mean
periodic payments made by reason of retirement or death in consideration for services rendered,
or by way of compensation for injuries received in connection with past employment.
Under paragraph (2), alimony and annuities paid to an individual who is a resident of a
Contracting State are taxable only in that Contracting State. The term "annuities" is defined to
mean a stated sum paid periodically at stated times during life, or during a specified number of
years, under an obligation to make the payments in return for adequate and full consideration,
other than for services rendered. The term "alimony" is defined to mean periodic payments made
pursuant to a decree of divorce, separate maintenance agreement, or support or separation
agreement which are taxable to the recipient in his Contracting State of residence, under its
internal laws.
This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation). A Contracting State, therefore, may tax a citizen of that Contracting State who is a
resident of the other Contracting State on income dealt with in this Article, without regard to its
provisions.
ARTICLE 24
Social Security Payments
Social security payments and other public pensions paid by a Contracting State to a
resident of the other Contracting State or to a citizen of the United States are taxable only in the
Contracting State making the payment. This Article does not apply to pension payments for
government service covered in Article 22 (Governmental Functions). The term "other public
pensions is understood to include United States railroad retirement pensions.
The provisions of this Article are not overridden by the saving clause (see exceptions to

the saving clause in paragraph (4) of Article 4 (General Rules of Taxation)). A citizen or resident
of the Contracting State, therefore, who receives a social security payment from the other
Contracting State is exempt from tax on that payment in his State of residence or citizenship.
ARTICLE 25
Diplomatic And Consular Officers
This Article provides that nothing in the Convention will affect the fiscal privileges of
diplomatic and consular officials under either the general rules of international law or under the
provisions of special agreements.
ARTICLE 26
Limitation on Benefits
This Article, taken together with paragraph (6) of Article 4 (General Rules of Taxation),
is designed to prevent abuse of the Convention by limiting the benefits of the Convention to
those residents of a Contracting State who are properly entitled to those benefits. The intent of
these two sets of provisions is, first, to prevent residents of third countries from establishing
entities in a Contracting State for the purpose of deriving treaty benefited income from the other
Contracting State. This is an issue of particular importance to the United States in a treaty with a
country like Cyprus which has established in its domestic law a system of special measures
providing substantially reduced tax rates in Cyprus on income derived from certain offshore
activities and investments. With little difficulty, a nonresident of Cyprus can establish an entity
in Cyprus to derive such income.
It is also the intent of these provisions to deny the granting of treaty benefits by one
Contracting State to a resident of the other Contracting State, even if the beneficial owner of the
income is a resident of that other Contracting State, where the income is subject to tax in that
other Contracting State at a rate which is substantially less than the rate generally applicable to
income in that other Contracting State. Since one of the principal purposes of a tax treaty is to
avoid double taxation, the justification for reductions in tax by treaty in the State of the source of
income ceases to exist when that income is exempt or subject to substantially reduced taxes in
the State of residence of the income recipient. This limitation on benefits under the Convention
(paragraph (6) of Article 4) will apply with respect to several provisions of Cyprus law. For
example, section 28(A) of Cypriot law provides that certain offshore companies in Cyprus which
are owned by aliens are taxed at a rate of 4.25 percent instead of the normal rate of 42.5 percent.
Similarly, under section 8(w) of Cyprus law, a 90 percent exemption is provided for offshore
dividends or profits of a Cypriot resident. There are other provisions of Cyprus law to which this
provision would be similarly applicable. This provision of the Convention has applicability in the
United States as well as in Cyprus. Residents of the United States, for example, who benefit from
the exclusion of foreign earned income under Code section 911, would not be entitled to treaty
benefits from Cyprus with respect to that excluded income.

Paragraph (1) of Article 26 denies any relief from taxation by a Contracting State under
the treaty to a resident of the other Contracting State, other than an individual (individuals are
covered by paragraph (6) of Article 4), unless two conditions are satisfied, or unless the
provisions of paragraph (2) apply. The first condition is that more than 75 percent of the
beneficial interest in the resident of that other Contracting State (or if that resident is a
corporation, more than 75 percent of the number of shares of each class of its shares) is owned,
directly or indirectly, by one or more individual residents of that State. The second condition,
which must also be satisfied if treaty benefits are to be granted, is that the gross income of that
resident not be used in substantial part, directly or indirectly, to meet liabilities to persons who
are not residents of a Contracting State and who are not United States citizens. The term
"liabilities", as used in the second condition, means deductible expenses, and includes liabilities
for interest (including accrued interest on original issue discount obligations if deductible under
Cypriot law) and royalties. The term "gross income" has the same meaning for purposes of this
Article as its meaning under the Code, thus, for example, cost of goods sold would be deducted
from the gross receipts of a manufacturing enterprise before applying the second test.
The ownership test in the first condition will be presumed to be met by a corporation that
has substantial trading in its stock on a recognized stock exchange in a Contracting State. A stock
exchange will be a "recognized exchange" only if so designated by agreement of the competent
authorities. Since Cyprus does not presently have a stock exchange, no exchanges are specified in
the Convention. It is contemplated, however, that the competent authorities will agree that the
major United States stock exchanges and the NASDAQ system in the United States will qualify.
If and when a stock exchange is established in Cyprus, the competent authorities will, at that
time, consider whether the listing and trading frequency requirements of the exchange are
sufficient for it to be a recognized exchange.
Under paragraph (2), paragraph (1) will not apply, and benefits will not be denied, even if
the conditions of paragraph (1) are not met, if it is determined that the establishment, acquisition
and maintenance of the person claiming treaty benefits and the conduct of its operations did not
have the obtaining of treaty benefits as a principal purpose. This test recognizes that there are
bona fide business reasons for an entity in a Contracting State to be owned by residents of a third
State. In many circumstances, the granting of treaty benefits to such a person is not inconsistent
with the objectives of the treaty. This test would be met, for example, if a Cyprus company
owned by residents of third countries conducts business operations in Cyprus and holds
investments in the United States, or engages in business activities in the United States, which are
related or incidental to those business activities. For example, if the Cyprus company lends
money to a supplier in the United States in order to assure a source of supply, and thereby derives
interest income from the United States, that income could be considered incidental to its business
activities. The test of paragraph (2) would also be met if the aggregate Cypriot tax burden is
equal to or greater than the tax reductions claimed under the Convention. The test could also be
satisfied in other ways. It should be noted that a resident of Cyprus who, under paragraph 6 of
Article 4, fails to qualify for treaty benefits cannot have the benefits restored by virtue of
paragraph 2 of this Article.
Paragraph (3) provides a special rule concerning certain trust situations. The benefits of

the Convention do not apply to income derived by a trustee which, under the Convention, is
treated as income of a resident of a Contracting State, if a principal purpose of the use of the trust
was to obtain a benefit under the Convention. For example, if a United States resident establishes
one or more Cypriot accumulation trusts with United States beneficiaries to receive dividends
from United States corporations in order to reduce the United States tax on those dividends, the
reductions in United States tax provided under paragraph (2) of Article 12 (Dividends) will not
apply.
This Article is not intended to impose any added burden on United States withholding
agents, and withholding agents will not be required to verify a person's ownership or purposes.
In applying this Article, the normal burden of proof rules apply. For example, under
present United States procedures, an entity that is a resident of Cyprus and that believes it is
entitled, under one of the alternative tests of this Article, to the 10 percent United States tax rate
on interest provided by paragraph (2) of Article 13 (Interest) would merely file an Internal
Revenue Service Form 1001 with the appropriate withholding agent to claim the benefit. The
Internal Revenue Service retains the right, on audit, to examine the return. The United States, of
course, is not bound in the future to continue to apply current procedures, and any charge in
United States withholding procedures could be applicable under this Convention as well.
ARTICLE 27
Mutual Agreement Procedure
This Article provides for cooperation between the competent authorities to resolve
disputes which may arise under the Convention. Paragraph (1) provides that a resident of a
Contracting State may, if he considers that the actions of one or both of the Contracting States
may result for him in taxation which is not in accordance with the Convention, present his case to
the competent authority of the Contracting State of which he is a resident. He need not have
exhausted the remedies in the national laws of the Contracting States before bringing his case to
the competent authority.
If the competent authority to which the case is brought judges the case to have merit, it
shall endeavor to come to an agreement with the competent authority of the other Contracting
State in order to avoid taxation contrary to the provisions of the Convention.
Paragraph (2) authorizes the competent authorities to seek to resolve difficulties or doubts
that may arise as to the application of the Convention. The paragraph includes examples of the
kinds of matters about which the competent authorities may reach agreement. They may agree to
the same attribution of income, deductions, credits or allowances of a resident of a Contracting
State to its permanent establishment in the other Contracting State, or to the same allocation of
these items between two or more persons. They may also agree to the same determination of the
source of an item of income, to uniform accounting for income and deductions, to the same
characterization of an item of income and to a common meaning of a term Such agreements need
not conform to the internal law provisions of the Contracting States. The competent authorities

may discuss the application of the provisions of domestic law regarding penalties, fines and
interest in a manner consistent with the purposes of the Convention. They may also consult
together for the purpose of eliminating double taxation, with respect to the taxes covered by the
Convention under Article 1 (Taxes Covered), by extending the principles of the Convention to
cases not specifically provided for in the Convention. This list is not intended to be exhaustive
Of the matters about which the competent authorities may reach agreement.
Paragraph (3) provides that the competent authorities may communicate directly with
each other (including face to face meetings) for the purpose of reaching agreement under this
Article. Under paragraph (4), if the competent authorities are able to reach agreement, taxes will
be imposed, and refunds or credits allowed, by the Contracting States as necessary to give effect
to the agreement. Such agreement will be implemented notwithstanding any time limits in the
domestic law of the Contracting States. Thus, for example, if the agreement requires a refund of
tax in a Contracting State, that refund will be made even if the statute of limitations in that
Contracting State may have expired The statute of limitations, however, will not be overridden to
impose additional tax, because of the provisions of paragraph (2) of Article 4 (General Rules of
Taxation), under which a taxpayer's tax liability cannot be increased as a result of the application
of any provision of the Convention.
Paragraph (5) gives to the competent authorities the authority, by mutual agreement, to
increase any dollar amounts specified in the Convention. Thus, for example, if, after the
Convention has been in force for some time, economic conditions have changed so as to make
the dollar threshold for exempt earned income by students under paragraph (2)(b)(i) of Article 21
(Students and Trainees), or the income threshold for entertainers under paragraph (1) of Article
19 (Artistes and Athletes), unrealistically low, the competent authorities may agree to a higher
threshold. Such changes can result only in a reduction of tax liabilities under the Convention, not
in an increase.
The competent authorities of the Contracting States, under paragraph (6), are each
authorized to prescribe any rules and regulations which may be necessary for carrying out the
purposes of the Convention.
ARTICLE 28
Exchange of Information
This Article provides for exchanges of information between the competent authorities of
the Contracting States, and should be read along with the notes exchanged by the Contracting
States at the time of the signing of the Convention, in order to understand fully the scope of the
information exchanges contemplated by this Article.
Paragraph (1) provides that the competent authorities may exchange such information as
is pertinent to carrying out both the provisions of the Convention, and of the domestic laws of the
Contracting States concerning the taxes covered by the Convention (see Article 1 (Taxes
Covered)). Thus, for example, information may be exchanged with respect to a covered tax, even

if the transaction to which the information relates is a purely domestic transaction in the
requesting State, or is an international transaction not involving the Contracting State to which
the request is made, and, therefore, is not for the purpose of carrying out the provisions of the
Convention.
This paragraph grants to each competent authority the power to secure whatever
information is necessary for it to obtain in order to be able to comply with a request for
information under this Article. As is explained in the exchange of notes, the United States
already possesses the authority to secure any information to which this Article relates. The
Government of Cyprus, on the other hand, may appear not to have full authority in this regard
solely in its internal law. However, this provision of the Convention empowers the competent
authority of Cyprus to implement the broad scope of the information exchange, including the
following types of information which may otherwise not be available to it: bank information in
the custody of a taxpayer; information in the custody of a bank; information in possession of the
Central Bank of Cyprus 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. It is further understood
that civil and criminal sanctions may be imposed in Cyprus in the event that a person from whom
such information has been requested does not disclose it.
Paragraph (1) also provides assurances that any information exchanged will be treated as
secret and will be disclosed only to persons concerned with the assessment, collection,
enforcement or prosecution in respect of the taxes to which the information relates, or to persons
concerned with the administration of these taxes. Under this latter provision, information can be
disclosed, for example, to legislative bodies involved in the administration of taxes, and their
agents, such as the United States General Accounting Office. Such bodies are, of course; subject
to the same restrictions as to the use of any information received, both under the Convention and
under internal law, as are the competent authorities.
Paragraph (2) provides that when information is requested by a Contracting State in
accordance with this Article, the other Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of that other Contracting State, even if that State
has no direct tax interest in the case to which the information relates. The paragraph further
provides that the requesting State may specify the form in which information is to be provided
(e.g., depositions of witnesses and authenticated copies of original documents), in order that it be
usable in the judicial practice of that State. The other Contracting State will provide the
information in the requested form to the same extent that it can obtain information in that form
under its own laws and administrative practices with respect to its own taxes.
Paragraph (3) explains that the obligations undertaken in paragraphs (1) and (2) to
provide information do not require a Contracting State to carry out administrative measures at
variance with the laws or administrative practice of either Contracting State, to supply
information not obtainable under the laws or normal administrative practice of either Contracting
State, or to supply information which would disclose trade secrets or other information, the
disclosure of which would be contrary to public policy: A Contracting State may, however, at its

discretion, provide information which it is not obligated to provide under the provisions of this
paragraph. The exchange of notes makes clear that Cyprus is prepared to undertake measures and
provide information which may not be, but for the provisions of this Convention, otherwise
empowered to undertake or provide.
As explained in paragraph (4), the Convention contemplates that information will be
exchanged either on a routine basis, or on request in relation to a specific case. The competent
authorities may agree on the types of information to be exchanged on a routine basis. Information
may, of course, be exchanged in other circumstances, or under other procedures.
Under paragraphs (5) and (6), the competent authorities are obligated to notify each other
of amendments to the covered taxes, or the adoption of new taxes which, by virtue of paragraph
(2) of Article 1 (Taxes Covered), become covered taxes; and to transmit texts of the amendments
or new statutes They are also obligated to notify each other of the official publication of any
materials concerning the application of the Convention.
ARTICLE 29
Assistance in Collection
Paragraph (1) provides that one Contracting State will give limited assistance to the other
Contracting State in collecting its taxes. Each Contracting State is required to collect on behalf of
the other Contracting State only those taxes imposed by the other Contracting State as will assure
that any exemption or reduced rate of tax granted under the Convention is not enjoyed by persons
not entitled to such benefits.
Paragraph (2) makes clear that a Contracting State is not obligated to carry our measures
at variance with the laws, administrative practice or public policy of either Contracting State with
respect to the collection of its own taxes.
ARTICLE 30
Entry into Force
This Article provides for the ratification of the convention and for the exchange of
instruments of ratification. The Convention will enter into force upon the exchange of
instruments of ratification. The provisions of the Convention will first have effect with respect to
the income of calendar years or taxable years, and in the case of taxes payable at the source, with
respect to payments made, on or after January 1 of the year next following the year in which the
Convention enters into force.
ARTICLE 31
Termination

This Article provides that the Convention will remain in force indefinitely, but may be
terminated by either Contracting State. The Convention may be terminated at any time after five
years from its entry into force, provided that at least six months prior notice has been given
through diplomatic channels. In the event that such notice is given, the Convention will cease to
have force and effect in respect of income of calendar years or taxable years beginning, in the
case of taxes payable at the source, payments made, on or after January 1 of the year next
following the expiration of the six months' period.