The Cabinet on Wednesday approved a revised Double Taxation Avoidance Agreement (DTAA) between India and Cyprus, which provides for source-based taxation of capital gains on transfer of shares, instead of a residence-based approach. An agreement to this effect was reached in July between the two countries, according to which Cyprus investors’ capital gains on investments made in Indian companies after March 31, 2017, can be taxed here.
The India-Cyrprus DTAA revision comes on the heels of the recent change in the India-Mauritius tax treaty that allowed New Delhi to tax capital gains of investors from the island country if it arose from sale of shares of an Indian resident firm. The idea behind these changes is to end treaty abuse by foreign investors in the country and round-tripping of Indian funds.
The new tax regime with Mauritius that was agreed upon in May automatically applied to Singapore-based companies thanks to the linkage between India’s DTAA with the two countries. While Mauritius and Singapore, respectively, are India’s largest and second-largest sources of foreign direct investment (FDI), Cyprus is also a significant investor in the country — the European island country was the eighth largest investor in India in 2015-16 with FDI of R3,300 crore.
In the amended DTAA with Mauritius, apart from the grandfathering clause in relation to shares acquired before April 1, 2017, a two-year (April 1, 2017, to March 31, 2019) transitional phase is provided when the tax rates will be half India’s domestic rates.
India had also agreed to retroactively rescind its notification dubbing Cyprus as a “non-cooperative jurisdiction”. New Delhi has been putting pressure on the island country to agree to an end to capital tax waiver regime, but the latter used to resist the demand, citing the tax exemptions enjoyed by investors based in Mauritius and Singapore.
Apart from the capital gains exemption that is now being phased out, the India-Cyprus DTAA also allows waiver from withholding tax on dividends and a concessional tax rate of 10% on income from interest, royalties and fee for technical services. It is not clear the amended agreement covers these areas.