India, Cyprus agree to new tax treaty: Here's how it clears uncertainty for investors

New Delhi - India and Cyprus have “successfully” completed negotiations on the bilateral tax treaty which provides for source-based taxation of capital gains on share sale, the Cyprus Finance Ministry said on Thursday. [caption id=“attachment_2837790” align=“alignleft” width=“380”]  ThinkStock[/caption] The double taxation avoidance agreement grand fathers all income prior to 1 April 2017. “On June 29, 2016, the negotiation on the Double Taxation Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income between Cyprus and India has been successfully completed, in New Delhi,” the Cyprus Finance Ministry said in a statement. Cyprus is a major source of foreign fund flows into the country. From April 2000 until March 2016, India received Foreign Direct Investment worth Rs 42,680.76 crore from Cyprus. “The agreement reached provides for source-based taxation for gains from the alienation of shares; investments undertaken prior to April 1, 2017 are grandfathered with the view that taxation of disposal of such shares at any future date remains with the contracting state of residence of the seller,” the statement said. Rajesh Gandhi, Partner, Deloitte Haskins & Sells LLP said, “This announcement brings an end to the uncertainty surrounding the India-Cyprus treaty which has impacted foreign investments coming into India from Cyprus over the last 2 years. It is not surprising that the capital gains tax exemption has been removed under the Cyprus treaty which is in line with India’s thinking on treaties with Mauritius and Singapore. A grandfathering benefit which will protect investments till March 31 2017 is certainly welcome and will in fact help existing Cyprus investors which were quite anxious after the blacklisting of Cyprus by India. “In the past, Cyprus was more preferred by debt funds because of the low withholding tax of 10 percent on interest and interestingly Mauritius debt funds will now get a better treatment because of the 7.5 percent withholding tax rate under the revised Mauritius treaty. However any fresh investments from April 1 2017, either in equity or debt will be subject to India’s new GAAR provisions,” added Gandhi. The text has been agreed between the two negotiating teams of the contracting states and will contribute to further develop the trade and economic links between Cyprus and India, as well as with other countries. “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 as its standing an international business centre is elevated,” it added. The completion of the negotiation and the agreement reached on all pending issues will pave the way for the removal of Cyprus from the list of notified jurisdictional areas. It has been agreed that, following the entering into force of the amending Agreement the Indian Authorities will proceed with retrospectively rescinding the classification of Cyprus in the ‘Notified Jurisdictional Area’ as from November 1, 2013,” the statement added. Gautam Mehra, Leader - Tax, PwC India said, “The development on the India Cyprus tax treaty is another welcome step towards providing certainty in tax. The intent to grandfather existing investments, which is in line with a similar change proposed in the tax treaty with Mauritius, should provide comfort to existing investors. Further, the proposal to rescind the notification under section 94A with effect from November 1 2013 is another positive resolution.”