In September 2013 the office of Associate Chief Counsel of the
US Internal Revenue Service announced that a Cyprus resident
holding company qualified for benefits under the US-Cyprus double
tax treaty ("Treaty") and the reduced tax rate on
dividends from "qualified foreign corporations", despite
not meeting the share ownership requirements stipulated in the
Treaty.
Section 1(h)(1) of the Internal Revenue Code (the "Code")
generally provides that a taxpayer's "net capital
gain" for any taxable year will be subject to specific reduced
rates. The 2003 Act added section 1(h)(11), which provides that net
capital gain for purposes of section 1(h) means net capital gain
(determined without regard to section 1(h)(11)) increased by
"qualified dividend income." Section 1(h)(11)(B)(i)
provides that qualified dividend income means dividends received
during the taxable year from domestic corporations and
"qualified foreign corporations." One of the requirements
for this section to apply is that the dividends must have been
received from a country whose treaty fulfils the "treaty
test".
In order for the Cyprus company to meet the criteria of the
"treaty test", it had to be ascertained whether all the
requirements of the US-Cyprus treaty were met, and in particular
whether the Limitation of Benefits (LOB) clause of the treaty was
triggered. In order to qualify for the benefits of the treaty a
Cyprus corporation must be more than 75 per cent owned by
individual residents of Cyprus, and meet certain other
requirements, unless it is demonstrated that the establishment,
acquisition and maintenance of the Cyprus corporation and the
conduct of its operations are not principally aimed at obtaining
benefits under the treaty.
In the case in question the IRS agreed that the Cyprus company
could be considered as a "qualified foreign corporation"
as its incorporation was not solely driven by tax reasons,
particularly qualification for the benefits of the treaty. Although
the reasoning behind it was not explained, the case highlights the
existence of this relatively unusual and potentially valuable
exemption.
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