On the 2nd of December 2014, the Minister for Finance and the US Ambassador in Cyprus signed the Intergovernmental Agreement (the IGA) for the purposes of the application of the Foreign Account Tax Compliance Act (FATCA).

The IGA closely follows the Model I Agreement issued in November 2013 by the US Treasury. The signature of the agreement provides certainty and clarity to Cyprus and American financial institutions who engage in everyday commercial interaction. Further, it allows the Cyprus based financial institutions to accurately design their FATCA compliance models.

On a governmental level, the IGA allows the US or Cyprus to request a consultation process in order to develop appropriate rectifying measures where any difficulties may arise in the course of the implementation of the respective IGA.

In a nutshell the IGA provides for the automatic reporting and exchange of information in relation to financial accounts in Cyprus financial institutions held by U.S. persons, and the reciprocal exchange of information regarding U.S. financial accounts held by Cyprus residents in US financial institutions.

The IGA does not only define which entities are obliged to comply with FATCA rules but also defines which entities may be exempt or face lesser obligations because they do not pose significant risk for US tax evasion. The signing of the US-Cyprus IGA introduces a Cyprus-specific Annex II, which defines the Cyprus based entities that can be classified as Exempt Beneficial Owners, Deemed-Compliant Financial Institutions, and Exempt Products.

The implementing legislation is expected to be enacted within the coming month. The Tax Department is also expected to issue Guidance Notes that will direct Cyprus financial institutions in their FATCA compliance initiative.