Almost 3 months post Cabinet approval, India has signed a revised DTAA with Cyprus, which is considered by foreign investors as a popular tax haven.
It is not later than last year, on 18 November 2016, that signature of the new agreement for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income (DTT) between Cyprus and India was executed, and which has become effective as from 1 January 2017 in Cyprus and 1 April 2017 in India.
This DTT is known as the new DTT since there was a previous DTAA that was signed by the two countries on 13th June 1994.
In fact, before the initial DTAA, in 1993, Cyprus was blacklisted by India for being a non-cooperative jurisdiction, due to the deficiency or non-exchange of information contrary to other collaborative jurisdictions.
Some of the main provisions in the DTAA are as follow:
- Source based taxation of capital gains arising from alienation of shares instead of residence based taxation provided under the previous DTAA. A grandfathering clause has been included for investments made prior to 1 April 2017, in respect of which capital gains would continue to be taxed in the country of which the taxpayer is a resident.
- Gains from the alienation of other property, in particular ships or aircraft, are to be taxed only in the state of residence of the person which alienates such property.
- Updated provisions have been included in respect to the exchange of information in accordance with international standards, in order to enable the effective mechanism of exchange of banking and financial information between the two countries and to allow the use of such information not only for taxation purposes.
- Expansion of the scope of ‘permanent establishment’ and reduction of the tax rate on royalty in the country from which payments are made to 10% from the previous rate of 15%, which is in line with the tax rate under Indian tax laws. There was also an update of the text of other provisions in accordance with the international standards and consistent policy of India in respect of tax treaties.
Cyprus remains a very convenient location as regional headquarters for doing business with India, and accordingly this new treaty will create an advantageous environment which will enhance the economic relations between the two countries and attract more investors.