Most Read Contributor in British Virgin Islands, February 2017
After a three year standstill during which Cyprus was declared a
'notified' jurisdiction under the Indian tax code due to a
perceived lack of information sharing, Cyprus and India have now
signed a new double tax treaty replacing the treaty in place since
13 June 1994. The new treaty makes provision for a source based
taxation test of capital gains arising from an alienation of
shares, replacing the residence based test of the previous treaty.
The source based test mirrors the provisions recently inserted into
the India-Mauritius treaty. A grandfather clause has also been
inserted allowing for disposals up to 1 April 2017 to benefit from
the old residence regime test of taxation. This is a welcome
development adding certainty for existing investors and imminent
restructurings and disposals.
Importantly, the new treaty makes provision 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. The definition of a ‘permanent establishment’
has been expanded and the withholding tax on royalties has been
reduced from 15 per cent to 10 per cent. The new treaty will enter
into force after it has been ratified by the governments of the
respective treaty partners, likely to be in April 2017. Once the
treaty enters into force, the Indian authorities will rescind the
classification of Cyprus as a “notified jurisdiction”
retroactively from November 2013.
The favourable withholding tax rates of the previous treaty will
continue to apply, being 15 per cent on dividends from India to
Cyprus, (reduced to 10 per cent if the recipient is a company which
holds at least 10 per cent of the share capital of the
dividend paying company), and 10 per cent on interest. Dividends,
interest and royalties bear no withholding tax in Cyprus, in
accordance with local legislation, when sent to non-Cyprus
Cyprus and India have long enjoyed excellent trade and
investment relations and the new treaty, which improves the
existing agreement between the two countries on the avoidance of
double taxation effective since 1994, is expected to foster
increased use of Cyprus as a gateway both into and out of India.
The eager response of Cyprus to the notification that it will be
removed as a “notified jurisdiction” demonstrably
proves that the international services sector is a key priority of
the Cyprus government and the authorities are committed to an
action plan to tackle transparency and information sharing issues,
rectifying any alleged deficiencies with an aim to strengthening
investor relations with treaty partners such as India.
Further, in conjunction with Cyprus’ growing popularity as
a gateway to European investors under the Alternative Investment
Fund Managers Directive, the Cyprus-India treaty enhances
Cyprus’ position as an investment funds jurisdiction of
choice. Cyprus will now be able to afford both investors and
managers greater and more attractive opportunities to invest in
India through an EU fund vehicle subject to robust regulation and
compliance, at a time when India is experiencing great growth and
investment in sectors such as infrastructure, Fintech and
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The Common Reporting Standard (CRS) has been initiated by the Organization for Economic Cooperation and Development (OECD) aiming at improving international tax compliance and preventing tax evasion, through the automatic exchange of information between the countries that implement CRS.
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