History
India and Cyprus had signed an agreement in June 1994 and were bound to exchange information to avoid tax evasions. It is considered to be a tax haven before 2015 and stands seventh on the list of Foreign Direct Investment (FDI) destinations in India. India received foreign investments of approximately INR 42,680 from Cyprus from April 2000 to March 2016.
On 1st November, 2013 India has marked Cyprus as “Non- Cooperative Jurisdiction/ Notified Jurisdiction” under Section 94A of Income Tax Act, 1961 of India, upon its failure to disclose crucial information about money being transferred by Indian citizens and are suspects of tax evasions. Consequently, the transactions for transferring the funds from and to Cyprus reduced to avoid payment of higher withholding taxes and disclosure requirement. The authorities at Cyprus recognized the need to take effective steps in this regard and initiated change in their policies.
In October, 2015 the Organization for Economic Cooperation and Development (OECD) declared that Cyprus had been found to be complaint with the requirements and standards laid down by Global Forum on Transparency and exchange of information for tax purposes. Cyprus got rating equals to United States, United Kingdom and Germany. With this, Cyprus lost its status of a tax haven.
The new Treaty
Mid 2016 has been a very significant period for tax treaties of India with major tax havens. Marking a historic change, India – Mauritius tax treaty have been re-negotiated and it began a new chapter of foreign investments in India.
On 29th June, 2016 the Ministry of Finance of Cyprus issued a statement that they have completed the negotiations with India and reached at agreements on all pending issues between India and Cyprus after an official level meeting held on 28th and 29th June at New Delhi. On 1st July, 2016 the Indian Ministry of Finance issued a press release confirming the same and mentioning to provide a “Grandfathering clause” for investments made prior to 1st April, 2017 for residence based taxation of capital gains. These agreements also paved way for removal of Cyprus from notified jurisdictions with retrospective effect.
These provisional agreements later been put before the cabinet of Indian Government headed by Prime Minister of India and approved by the Cabinet in August, 2016. The approved agreements which will now replace the 1994 treaty were signed on 18th November, 2016 at Nicosia, the capital of Cyprus. Mr. Ravi Bangar, high Commissioner of India to Cyprus and Mr. Harris Georgiades, the Minister of Finance of Cyprus has signed the agreement on behalf of India and Cyprus respectively. It is expected to come into force with effect from coming financial year i.e. 1st April, 2017.
The Major Provisions
The new agreements provide for source based taxation of capital gains arising from transfer of shares rather than residence based taxation as provided under previous treaty. Accordingly, all the capital gains from transfer of shares can now be taxed in country of transaction and India shall benefit by taxing the transactions undertaken in the country by Cyprus residents.
It is important to note here that as provided by the “Grandfathering clause” in the agreement, investments made prior to 1st April, 2017 can be taxed in the country where the taxpayer is resident.
The new agreement broadens the scope of permanent establishment and rate of withholding tax on royalties is reduced from 15% to 10% to bring it in line with the tax rate under Indian Laws.
New agreement also defines the provisions related to the exchange of information between the countries as per international standards and both the countries assisting each other for collection of taxes. This new treaty also paves the way for removing Cyprus from “Notified Jurisdiction” in India with retrospective effect from November, 2013 after the treaty comes into force.
Conclusion
This is a welcome move for investor and industry in both the countries. Both the countries have enjoyed good trade relations in past decades and this step shall definitely foster the growth. Cyprus shall once again become one of the largest sources of FDI in India and other parts of the world. The government’s keenness to improve the level of transparency in investments to and from Cyprus have already started delivering results and Cyprus has become a popular destination for European investors under Alternate Investment Fund Manager Directive. If Cyprus manages to keep up with robust compliance and transparency, it shall soon be most preferred destination for investment vehicles across the world.
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