New Delhi: India and Cyprus have agreed to revise their tax treaty under which capital gains tax will be levied on sale of shares on investments made after April 1, 2017, thus bringing the island nation at par with Mauritius in terms of tax treatment on investments. As per an agreement reached between India and Cyprus on June 29, investments made prior to April 1, 2017, will be grandfathered. “The provisional agreement would be placed before the Union Cabinet for approval, subsequent to which the new tax treaty can be signed by the two countries,” the Finance Ministry said in a statement.
The new Cyprus Double Taxation Avoidance Agreement (DTAA), which has been agreed upon by both the countries, would provide for source-based taxation of capital gains on transfer of shares. “A grandfathering clause would be provided for investments made prior to April 1, 2017, in respect of which capital gains would be taxed in the country of which taxpayer is a resident,” the statement added. The completion of the negotiation on avoidance of double taxation and the prevention of fiscal evasion will also pave the way for the removal of Cyprus from the list of ‘Notified Jurisdictional Areas’ retrospectively from November 2013.
“It was agreed that India will consider rescinding the said notification with effect from November 1, 2013, and will be initiating the process for the same,” the statement said. Yesterday, the Cyprus Finance Ministry had issued a statement saying that India and Cyprus have “successfully” completed negotiations on the bilateral tax treaty in New Delhi on June 29.
“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 had said. These steps will bring certainty and clarity for FDI investors, said Krishan Malhotra, Senior Partner, Dhruva Advisors.
“Respecting the existing investments by introducing grandfathering provisions, considering to withdraw Cyprus as notified jurisdiction, and renegotiating the treaty by providing certainty way forward are very positive steps in the right direction,” Malhotra said. Both sides expressed satisfaction with the progress achieved in the meeting, and hoped that it would lead to resolution of all pending matters at the earliest,” the Finance Ministry statement said.
PwC India Leader (Tax) Gautam Mehra said this will act as 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,” Mehra said.
In 2013, India had declared Cyprus as ‘Notified Jurisdictional Area’ under the I-T Act for refusing to provide information sought by tax authorities under the exchange of information provisions of the bilateral agreement of 1994. The notification imposed tougher conditions and withholding tax on investments coming from Cyprus. The revised agreement is expected to contribute to further develop the trade and economic links between Cyprus and India and also with other countries. India and Cyprus have a DTAA since 1994.
Cyprus is a major source of foreign fund flows into the country. From April 2000 till March 2016, India received Foreign Direct Investment worth Rs 42,680.76 crore from Cyprus. India in May signed revised tax treaty with Mauritius under which capital gains will be levied on investments made after April 1, 2017.
Following amendment of the 33-year old tax treaty, companies routing funds into India through Mauritius after March 31, 2017 will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period. The levy is currently at 15 per cent. The full rate will kick in from April 1, 2019.