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New Cyprus-India Treaty for the Avoidance of Double Taxation

23 February 2017

A new double tax treaty was signed by Cyprus and India on 18 November 2016 replacing the treaty that was in place between the two countries since 13 June 1994. The new treaty entered into force on 14 December 2016, with its provisions being effective in Cyprus as of 1 January 2017 and in India as of 1 April 2017.

In addition the Indian Tax Authorities have rescinded the designation of Cyprus as a notified jurisdiction with retroactive effect from 1 November 2013 allowing the refund of excess withholding tax paid during that period by eligible claimants.

Capital Gains Tax

The new treaty replaces the basis for the taxation of capital gains arising from the alienation of shares from the residence-based test of the previous treaty to a source-based taxation test mirroring the provisions recently inserted into the India-Mauritius and the India-Singapore treaties.  

However under the grandfathering provisions that have been agreed shares acquired prior to 1 April 2017 will continue to be taxed on disposal in the contracting state of the seller.   This is an important development removing the uncertainty that existed for existing investors. 

Withholding tax rates

Under the new treaty the following withholding tax rates apply: 

∙ Dividends: 10%

∙ Interest:  10% (0% per cent where the beneficial   owner of interest is the government, a political sub‐division, a local  authority  of  the  other   contracting  state,  or  specified institutions) 

∙ Royalties: 10 per cent 

The above rates are relevant in the case of dividends paid from India.  Cyprus does not impose withholding taxes except on Cyprus sourced royalty payments.

Permanent establishment 

The permanent establishment article has been expanded to include a building site, construction, assembly or installation project, or any supervisory activities in connection with such site or project with a duration exceeding six months, as well as the provision of consulting services via employees or other staff with a duration exceeding 90 days during any twelve month period.    

An individual present on the territory of the other contracting state with the authority of habitually concluding agreements on behalf of the company in that treaty state may also constitute a permanent establishment, subject to tax in that other contracting state. The maintenance of a stock of goods from which regular delivery and securing of orders occurs may also be construed as creating a permanent establishment.

Exchange of information   

The new treaty provides for exchange of information by adopting Article 26 of the OECD Model Treaty into the treaty and assistance between the two countries for collection of taxes.

Other developments-The importance of substance

The Indian tax authorities have for some time been scrutinising and challenging tax planning strategies and structures that shift profits to locations with low taxation where there is little or no real activity and substance. The business services sector remains a crucial contributor to the Cyprus economy and the Cyprus Government is committed to tackle transparency and information sharing issues aiming to strengthen investor relations with its treaty partners.  Cyprus has signed up to and is already implementing the provisions of the OECD’s Base Erosion and Profit Sharing initiative.

Fund opportunities

The Cyprus‐India treaty enhances Cyprus’ position as an investment funds jurisdiction and will provide further impetus to Cyprus’ growing popularity as a gateway to European investors under the Alternative Investment Fund Managers Directive (AIFMD).  Cyprus is now able to afford both investors and managers attractive opportunities to invest in India through an EU fund vehicle that is subject to robust regulation and compliance and excellent tax infrastructure that is boosted by the renegotiated treaty. 

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