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FATCA and the Intergovernmental Agreement between the U.S.A. and Cyprus
Area(s) of Practice: Налоговое право

On 22 April 2014 the U.S.A. Department of Treasury (the “Treasury”) announced that Cyprus is among the jurisdictions that have reached an Intergovernmental Agreement ("IGA") with the Treasury to improve international tax compliance with the Foreign Account Tax Compliance Act (“FATCA”). The FATCA is a U.S.A. statute, targeting perceived tax abuse by American persons through the use of offshore accounts. American nationals, including individuals who live outside of the U.S.A, are required to report to the U.S.A. Internal Revenue Service (“IRS”) their financial accounts held outside of the U.S.A., while Foreign Financial Institutions (“FFIs”) are required to report to the IRS the financial assets and income of their American clients.

The aim of the FATCA is to increase compliance by American taxpayers rather than to enforce collection from foreigners, to make it more difficult for American taxpayers to conceal assets held in offshore accounts and shell corporations and to recoup federal tax revenues. Unlike many other developed countries, the U.S.A. levies income taxes on its citizens, regardless of residency, and therefore requires even Americans living abroad to declare and pay U.S.A. taxes on foreign income. Non-compliance with FATCA obligations could result in penalties in the form of a 30% withholding tax on specific payments relating to income sourced in the U.S.A.

The Treasury has issued two model IGAs. The first, known as the Model 1 IGA, requires FFIs to report all FATCA-related information to their own governmental agencies, which would then report the FATCA-related information to the IRS. Some Model 1 IGAs are reciprocal, requiring U.S.A. to provide certain information about residents of the Model 1 country to the Model 1 country in exchange for the information which that Model 1 country provides to the U.S.A.

The Model 2 IGA requires FFIs to report information directly to the IRS. Under such IGA, FFIs are required to register with the IRS and sign a version of the FFI  automatic exchange of information agreement.

A Model 1 IGA between the U.S.A. and Cyprus is treated to be "in-effect" by the Treasury and the IRS, with effect as of 22 April 2014. The U.S.A. and Cyprus governments have reached into an agreement in substance as to the terms of the IGA and Cyprus has expressly consented to be included in the relevant "in-effect" list, although the final text of the IGA has not yet been published.

FFIs (including banks, custodians, brokers, investment funds and insurance companies) that are resident in Cyprus, are required to register on the IRS FATCA website until 31st December, 2014 and receive a Global Intermediary Identification Number (“GIIN”). The issuance of a GIIN will allow the Cyprus FFIs to demonstrate FATCA compliance to their international business counterparties.

To date, the U.S. has signed IGAs with at least 26 jurisdictions and has reached agreements in substance or is in advanced discussions with many others in order to achieve effective cross-border tax information reporting, an objective which is also aligned with the European Commission’s policy to combat tax evasion.

From a Cypriot perspective, this development will greatly ameliorate Cyprus’s business collaboration with the U.S.A. and enhance Cyprus’s profile as a transparent International Business Centre.

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