India and Cyprus complete negotiations on DTAA
The Dollar Business Bureau
India and Cyprus had signed a DTAA (double taxation avoidance agreements) in 1994. Since then the little island nation has become one of India's seventh largest source of FDI into the country accounting for Rs 42,680.76 crore between 2000 and 2016. During fiscal 2015-16, FDI inflows from Cyprus aggregated around Rs 3,317 crore making Cyprus the 8th largest FDI contributing-country to India.
However in November 2013, a fallout between the two countries regarding non-disclosure of tax-related information led India to place Cyprus under the 'Notified Jurisdictional Area' simply put ,blacklisting it This meant a higher withholding of tax in India for Cypriot resident investors of atleast 30% against the more beneficial rates of 10% as prescribed in the India-Cyprus tax treaty. India was keen that Cyprus accepts its 'limitation of benefit' clause (LOB) that Cyprus was reluctant to accept as that could put a strain on its economy. Since then the Cyprus government has been in talks with its Indian counterparts to negotiate on the bilateral tax treaty suitable for both the countries.
On 29th June, 2016, India and Cyprus succesfully came into an agreement on the bilateral tax treaty which provides for source-based taxation of capital gains on share sale, the Cyprus Finance Ministry said. However the new DTAA grandfathers all income prior to April 1, 2017. In other words, a Cypriot resident-investor who has invested in Indian shares prior to this date will not have to pay tax on capital gains in India.
The Cyprus Finance Ministry in a statement said, “The agreement reached provides for source-based taxation for gains from the alienation of shares; investments undertaken prior to April 1, 2017 are grandfathered with the view that taxation of disposal of such shares at any future date remains with the contracting state of residence of the seller.”
India has also recently signed a protocol wth Mauritius which provides for the grandfathering of investments made prior to April 1, 2017. The disagreement between India and Mauritius was similar but India didnt blacklist the small island nation as the Mauritian government has always been positive in its reach and has been willing to share tax-related information readily.