New India-Cyprus tax treaty set to improve relations
The classification of Cyprus as a notified jurisdiction will be withdrawn retrospectively from November 2013.
In 2011, in its fight against the use of overseas tax havens and the ‘round-tripping’ of money, the Indian Government enacted a provision alllowing it to notify a country or a territory as a notified jurisictional area’ (NJA) where the country or territory was not effectively exchanging information with India. A catastrophic 30% withholding tax is imposed on taxpayers located in an NJA – irrespective of whether a double taxation avoidance agreement (DTAA) exists between the jurisdiction and India.
New agreement between India and Cyprus
On 1 November 2013, Cyprus became the first and only NJA after the Indian Government cited noncooperation regarding the sharing of tax information. Following discussions between the Cyprus Ministry of Finance and the Indian Government, on 18 November 2016, the two countries agreed a revised DTAA replacing the previous version from 1994. The classification of Cyprus as a NJA was rescinded retrospectively as of 1 November 2013.
The new agreement provides for assistance between the two countries for the collection of taxes. It also updates the provisions related to the exchange of information to accepted international standards, expands the scope of permanent establishment and reduces the tax rate on royalties in line with the tax rate under Indian tax laws. It also updates the text of other provisions in accordance with international standards and India’s tax treaties.
The agreement further incorporates source-based taxation for capital gains from alienation (disposal) of shares. In other words, India shall have the right to tax capital gains arising on Cyprus tax residents on the transfer of shares of an Indian company and the grandfathering of investments undertaken before 1 April 2017. Disposal of such shares at any future date would continue to be taxed in the country of residence.
Provisions under the new DTAA will come into force following the completion of necessary internal procedures in both countries. It is expected to come into effect in India in respect of income derived in fiscal years beginning on or after 1 April 2017.
Upgrading and expanding the network of double tax conventions is of high economic and political importance and aims to further strengthen and attract foreign investment in Cyprus. It is a significant development and will contribute towards further developing the trade and economic links between India and Cyprus.
For more information, contact:
Chaturvedi & Shah, India
T: +91 22 30228528