Cyprus: India To Revise Cyprus And Singapore Tax Treaties By 2017

Last Updated: 17 June 2016
Article by Charles Savva

India's recently revised tax treaty with Mauritius has signalled the modification of the tax agreements with Singapore and Cyprus, so as to achieve uniformity with capital gains tax on investments, both of which are expected to be initiated within this fiscal year.

"Talks are on...With Mauritius tax treaty done, Cyprus talks would move swiftly now," said an Indian government official, bringing the topic to the foreground, after India took the harsh step of declaring Cyprus a non-cooperative jurisdiction in November 2013.

Recently, Finance Minister Arun Jaitley met Demetrios A Theophylactou, High Commissioner of Cyprus to India, and is believed to have discussed the renegotiation of the tax treaty.

Cyprus currently ranks seventh in terms of foreign direct investment into India. The tax treaty which is now 20 years old and was signed in 1995, offers benefits such as zero withholding tax on dividends to residents and capital gains tax exemptions. It also offers a low rate of tax of 12.5% on royalties, interest and fees for technical services.

India is keen to renegotiate the tax treaty with Cyprus, with Mauritius now paving the way forward.

The India and Mauritius tax treaty amendment was announced 10 May 2016, resurrecting India's right to capital gains tax.

Concerns about treaty shopping and "round-tripping" of Indian funds has sparked off corrective measures in India's tax treaties.

Cyprus was named as a non-cooperative jurisdiction, due to a row over sharing of information, relating to Indian bank account holders. Cyprus was the first Mediterranean island to be labelled as such by India, resulting in a 30% withholding tax on all payments made to Cyprus, and Indian entities taking receipt of funds from Cyprus being obliged to make additional disclosures, including source of funds.

Indian entities with investments from Cyprus must also forego deductions on account of expenditure and allowances.

In May 2014, soon after the Narendra Modi government came to power, it resolved to enforce a stringent framework to deal with "black money", in line with election pledges.

It has since unveiled a series of measures including the setting up of a special investigation team on black money and a new law to deal with undisclosed overseas assets.

"While Cyprus-based funds continue to enjoy capital gains tax exemption in India, they would have to deal with the adverse perception around the blacklisting of Cyprus by India as well as the potential impact of GAAR (general anti-avoidance rules)," conveys Rajesh H Gandhi, Partner, Tax, Deloitte Haskins & Sells LLP. "The government might therefore want to get its treaty with Cyprus amended so that there is more certainty for Cyprus funds and ensure that there is parity in tax treatment with Mauritius and Singapore."

It remains to be seen how FDI into India is affected now that the capital gains tax exemption in the Mauritius, Cyprus and Singapore tax treaties is eliminated. These three structuring routes were most commonly used by multinationals and investors doing business in India, who could eliminate any exposure to Indian capital gains tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Charles Savva
 
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