Cyprus and Italy recently signed an additional protocol on the avoidance of double taxation, which will remove Cyprus from the so-called ‘black list’ of Italy, thus solving pending tax issues of the past seven years between the two countries. This protocol, has now been ratified by both countries and has come into effect.

By way of a ministerial decree issued on July 27, 2010 Italy removed Cyprus from the black list for the purposes of (amongst others) the application of Italian controlled foreign companies rules, or ‘CFC rules’. As a result of the removal, Italian owned foreign companies established in Cyprus are no longer subject to Italian CFC rules, which may lead to the immediate inclusion of profits of direct and indirect subsidiaries owned by Italian companies in the taxable bases of the latter entities.

Inclusion on the blacklists has had little practical significance since Cyprus joined the EU in 2004. Nevertheless, removal from the blacklists is an important recognition that companies and individuals with activities in Cyprus will now have totally ordinary fiscal status as far as the Italian tax system is concerned.