India and Cyprus have agreed to provide information for source based taxation of capital gains on transfer of shares under India Cyprus Double Taxation Avoidance Agreement. As per the agreement, investments made prior to April 1, 2017, will be grandfathered.
Speaking on the development, Pranav Sayta, Tax Partner, EY India, said: “The amendment to the India Cyprus Tax Treaty to the effect that India will have the right to tax Capital Gains earned by a Cyprus resident on sale of shares of an Indian company is on expected lines – especially after the recent announcement of a similar amendment made in the India Mauritius Tax Treaty.
In effect Cyprus resident entities will be subject to Indian Capital Gains tax on sale of shares of an Indian company on or after 1 April 2017 but shares acquired upto 31 March 2017 will be grandfathered with the result that sale at any time in future of such shares acquired on or before 31 March 2017 continue to qualify for the capital gains tax exemption as currently available. This seems consistent with the Policy intent of taxing Capital Gains earned by non-residents on sale of shares of Indian companies from 1 April 2017 while grandfathering investments made upto 31 March 2017. The amendment of the Cyprus Treaty is of particular interest given that Cyprus was notified as a non-cooperative jurisdiction which notification it seems is to be retroactively rescinded upon the amendment’s entry into force.”
In a tweet, the Ministry of Finance highlighted the salient features of the agreement.
In-principle agreement reached on all pending issues on Double Taxation Avoidance Agreement between India and Cyprus pic.twitter.com/sggx0Dpo6T
— Ministry of Finance (@FinMinIndia) July 1, 2016
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.
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.”
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.
